Private Mortgage Insurance
Private Mortgage Insurance (PMI) is a guaranty tied to mortgage payment performance, which provides coverage in the event of mortgage loan defaults that lead to claim events such as a foreclosure sale, deed in lieu or third-party sale. PMI is Freddie Mac’s most commonly used form of Charter-required credit enhancement.
Freddie Mac’s Congressional Charter enables purchases of low-down-payment loans with PMI because the mortgage insurance helps protect against a portion of the losses from a credit default. As such, Freddie Mac selects mortgage insurance companies vetted and approved through the robust guidelines of the Private Mortgage Insurer Eligibility Requirements (PMIERs). Freddie Mac is committed to housing affordability and diversity in lending, and PMI offers those who cannot afford a 20% down payment another avenue to home ownership. Low-down-payment lending contributes to diverse CRT offerings, while PMI reduces credit risk exposure to Freddie Mac and its CRT investors.
Freddie Mac requires mortgage insurance coverage on mortgages with loan-to-value ratios (LTV) greater than 80%. The percentage of coverage depends on the term of the mortgage and the actual LTV. Mortgage insurers have three options to settle a claim: payment percentage (most common), third-party sale or acquisition. Take, for example, a fixed-rate mortgage on a $200k property with a 10% down payment and 25% in mortgage insurance coverage. If a default occurs and the mortgage insurer chooses to handle the claim by paying the insured percentage of the outstanding balance, the ultimate loss exposure for lenders and investors is reduced to 67.5% of the original property value.
Master Policy and Claims Process
A Master Policy (insurance contract) is executed between a mortgage insurer and a Seller/Servicer with Freddie Mac named as an express, intended beneficiary. In event of a default, Freddie Mac files a claim to the mortgage insurance company within 60 days of a foreclosure sale. The claim must be perfected* (provision of all information or proof required by the insurer, and satisfaction of all requirements of the Master Policy applicable to payment) within 120 days. The mortgage insurance company then remits payment to the beneficiary on the claim within 60 days of the claim being perfected.
The Homeowners Protection Act of 1998 (HoPA) requires that borrower-paid private mortgage insurance (BPMI) be automatically cancelled when a specified amount of equity has been built up in the home. In addition, Freddie Mac’s Selling/Servicing Guide establishes criteria for when a borrower is eligible to request their mortgage insurance be cancelled prior to automatic cancellation.