Fannie Shifts $5 bln in Taxpayer Risk to Newcomer NMI

Fannie Mae checked off another box on the Federal Housing Finance Agencies 2013 Conservatorship Scorecard by recently signing an agreement for credit risk coverage for over $5 billion of its single family mortgages.  The agreement with National Mortgage Insurance Corporation (National MI) provides credit risk coverage for certain loans acquired by the company in the fourth quarter of 2012 with original loan to value (LTV) ratios between 70 and 80 percent.

The terms of the policy, which became effective on September 1, will lower Fannie Mae's exposure on the loans to approximately 50 percent LTV subject to a deductible and aggregate loss limits and will further the score card goals of transferring at least $30 billion of its single-family mortgage risk to private sources of capital. 

Emeryville, California based NMI is a newcomer in the private mortgage insurance world.  The company, which is heavily staffed by former employees of now-bankrupt PMI group, once the second largest private mortgage insurer, was started in 2012 with a $550 million investment from hedge funds and mutual funds.  SF Gate has identified Kyle Bass, founder of Hayman Capital as one major investor saying he was principally known for betting against subprime mortgages.  National MI has declined to identify any investors other than Bass.

The new company came out of the gate fast.  In January of this year they became only the second private mortgage insurance company since the mortgage meltdown to get approval to insure Freddie Mac and Fannie Mae loans.  Borrowers are typically required to obtain a private mortgage insurance policy for the benefit of the lender when a loan's LTV is less than 80 percent.   On its website the company says it "brings the capacity to insure $30 billion in new business and the financial strength that comes from having no legacy risk."

Andrew Bon Salle, executive vice president for underwriting, pricing, and capital markets at Fannie Mae said of the agreement, "This insurance policy transfers credit risk away from taxpayers, which is an important element of creating a more sustainable housing finance system.  We will continue working with FHFA to meet the goals of the Conservatorship Scorecard for 2013 to reduce risk for Fannie Mae and taxpayers." 

Fannie Mae says it expects to make additional transactions this year to meet its Scorecard goals.