Fitch Ratings: GSEs Negatively Impacted by Mortgage Insurance

Freddie Mac has reported a $4.4 billion third quarter loss, partly driven by a reduction of mortgage insurance recoveries. Fitch Ratings believes future results for both government-sponsored entities (GSEs) under the conservatorship of the Federal Housing Finance Agency (FHFA)—Fannie Mae and Freddie Mac—will continue to be negatively affected by additional deterioration in the mortgage insurance (MI) industry.  Fitch feels mortgage insurers may be forced to make additional haircuts on payments to GSEs as homeowners with the riskiest types of mortgages continue to default. The new business volumes being written are not sufficient to offset continued losses from the legacy books of business. Last month, the main subsidiary of one of the leading mortgage insurers, PMI Group Inc., was seized by insurance regulators after sustaining major losses stemming from the sub-prime crisis. PMI Mortgage Insurance Company is under exclusive control of the Arizona department of insurance and paying just 50 percent on its claims. Fitch thinks other insurers remain vulnerable, posing additional threats to GSEs. In addition to insurance payment trouble, the GSEs are also impacted as interest rates have continued to drop to historically low levels. Their derivative books, which are used as a hedge for increasing interest rates, must be marked down if rates drop. The Federal Reserve isn't expected to adjust interest rates until mid-2013.