Here’s an off the wall thought. Does the new Obama plan take some pressure off the mortgage insurance companies?

Assuming that it works and some, what, four or five million borrowers with Agency mortgages refinance, that has to pull a lot of potential loss exposure off the books of the MI companies. As I read the program, the portion of the charters that established Fannie and Freddie which limit the companies to loans of 80% or less of the value of a property will be suspended or amended and the two will assume all of the risk. By definition, any loan that they refinance which did carry MI will no longer have that coverage.

I would imagine that a majority of the loans refinanced under the program will have been made to high LTV borrowers who would most likely have had mortgage insurance. These are also the most at risk loans so logically the MI companies should see a lot of potential liability disappear.

The corollary is that this may threaten the MI companies franchise. Once the principal of requiring mortgage insurance for any loan over 80% has been abrogated what stops the Congress from allowing F&F to make new loans above the limit with no MI?

Just one more thought here. I doubt it was included in the cost estimates for the program but if you start playing with numbers, F&F appear to be taking on a lot more risk. Let’s pull some numbers sort of semi out of the air.

Assume that 4 million borrowers who have loans from either one of the two decide to use this program. Now let’s assume that the average loan is $200,000 and that half of those who opt to refinance have mortgages with MI coverage. Say, that F&F have 20% coverage on these loans, in other words the MI company takes the first 20% of any loss. Working that out I come up with $80 billion of extra risk which was insured that Fannie and Freddie would assume. Now those are pretty rough numbers but I bet they aren’t as far off as they might seem. Considering that these borrowers are high risk, there is a lot of potential loss hanging around. 

Aren’t these government initiatives fun?