GSEs confirm haircut applies to coronavirus-related loan defaults

It's official: the private mortgage insurer capital requirements that apply in natural disasters — allowing the six insurers to hold less liquidity against forbearances — also apply to coronavirus-related delinquencies

Experts in the industry had largely presumed that, if an insured loan was not paid as scheduled due to coronavirus-related issues, the mortgage insurer would be able to discount the Private Mortgage Insurer Eligibility Requirements by 70%, as they would for forborne mortgages in a FEMA-declared disaster area.

The clarification permanently changes the definition for natural disasters, as well as some specific changes that apply for COVID-19. It was issued by Fannie Mae, which worked with Freddie Mac under the guidance of the Federal Housing Finance Agency to announce the change.

In the 2018 PMIERs update, the GSEs created a risk factor to address forbearances from FEMA-declared natural disasters.

"This type of forbearance is often used for natural disasters such as hurricanes or other shorter-term disasters that occurred in a specific geographic area, and generally have a definite period for the event. However, due to the unprecedented nature of the COVID-19 disaster, including its national scope and the ongoing duration of the health and economic effects, the PMIERs language needed additional clarity, which we are pleased FHFA, Fannie Mae and Freddie Mac understood and provided," Lindsey Johnson, president of the trade group U.S. Mortgage Insurers, said in a statement.

The coronavirus-specific changes to the capital retention calculation applies to insured mortgages for which the initial missed payment took place on or after March 1 but prior to Jan. 1, 2021, or is subject to a forbearance plan granted in response to a financial hardship related to COVID-19.

But that Jan. 1 end date is not locked in.

"If it is determined that the COVID-19 crisis period needs to be extended, this guidance will be updated," Fannie Mae said in its bulletin.

Another temporary revision applies to servicers and the handling of premium payments if the borrower is delinquent. This would be a change to the master policy that governs the relationship between the servicer and the insurer.

"During the COVID-19 crisis period, in the event one or more servicers are unable to meet their master policy requirements with respect to advancing the payment of premiums on delinquent loans, approved insurers have agreed to notify Fannie Mae of their intent to cancel coverage for non-payment of premium and give Fannie Mae the opportunity to pay the premium on behalf of the servicer to keep the coverage in force," the bulletin said.

This same rule change also applies to Freddie Mac servicers.

To allow the private mortgage insurers to conserve capital during the crisis period, the change also temporarily restricts upstreaming of dividends to their respective holding companies.

From a stock investor perspective, that's a bit of a negative offset to the favorable clarifications around the haircut and the payment of premiums, said B. Riley FBR analyst Randy Binner.

"This is not surprising considering the reporting accommodation around forbearance, and capital return is not central to our MI call," Binner said in a report. He rates all three companies he follows — NMI Holdings, MGIC Investment and Radian Group — as buys.