Freddie Mac, the No. 2 U.S. home funding company, said it will give its private mortgage insurance partners some relief by reducing the amount of money they must put into Freddie Mac's reinsurance system, leaving them more reserves to cover failing loans.
The company said the change was triggered by the decline in home prices and the poor performance of subprime, Alt-A and other higher-risk mortgages. The temporary change is aimed at enabling mortgage insurers to retain more insurance premiums to pay current claims and rebuild their capital base, it said.
Mortgage insurers have been battered with losses as borrowers missed payments and investors stopped buying a wide variety of debt perceived to carry too much credit risk.
The action concerns Freddie Mac's captive reinsurance structure, in which the mortgage insurer pays a portion of its premium income to a special trust set up to cover a previously agreed share of losses from a pool of mortgages.
Effective on or after June 1, the portion of the premiums that Freddie Mac-approved private mortgage insurers pay to captive reinsurers, or cede, will be limited at 25 percent, the company said in a news release.
"Beyond limiting the allowable cede to 25 percent, the temporary policy does not limit the mortgage industry's use of captive reinsurance," the company said.
