Fannie Mae's Enterprise-Paid Mortgage Insurance Option
At Fannie Mae, we closely collaborate with our lender customers to offer a simple, more certain loan sale experience and expand the housing finance options available to borrowers. As part of these efforts, we're now offering an alternative to the borrower-paid mortgage insurance (BPMI) and lender-paid mortgage insurance (LPMI) options that lenders have today. Fannie Mae's Enterprise-Paid Mortgage Insurance (EPMI) offering provides our lender customers with another option for obtaining mortgage insurance that satisfies Fannie Mae's charter requirement for high-LTV loans. Initially we are offering EPMI on a limited pilot basis, as an execution option that is available to participating lenders and borrowers.
This new lender option enables us to streamline the operational requirements of participating lender customers, increase the certainty of coverage for our credit investor partners, and better manage Fannie Mae's counterparty risk. EPMI applies many of the same concepts developed in our Credit Insurance Risk Transfer™ (CIRT™) structure to our charter-required credit enhancement, and represents another innovation for transferring credit risk from Fannie Mae to the private market while diversifying the providers of the credit protection for our single-family book of business.
If the EPMI pilot demonstrates that participating lenders value the product offering and choose the option for a material portion of their loan deliveries to Fannie Mae, and that there is a viable insurance market for the EPMI product, Fannie Mae will look to make the option available to all lenders.
Understanding Fannie Mae's MI options
Fannie Mae's congressional Charter requires us to ensure appropriate credit enhancement of loans that have an LTV ratio greater than 80% when acquired by Fannie Mae. Today, loans with LTV ratios greater than 80% are generally delivered to Fannie Mae with mortgage insurance acquired by the lender. The majority of these insured deliveries are covered by BPMI, while 10-15% of these insured deliveries are covered by LPMI. In both of these scenarios, the lender secures the MI coverage prior to loan delivery to Fannie Mae.
How EPMI works
EPMI is a new alternative to the traditional mortgage insurance acquired by lenders. EPMI enables lenders to deliver a loan with an LTV greater than 80% to Fannie Mae without the lender-acquired mortgage insurance, in return for an additional loan-level price adjustment fee paid by the lender to Fannie Mae.
Loans delivered under the EPMI option would be covered under a forward insurance arrangement, secured by Fannie Mae from an approved insurance provider that may be:
- a qualified insurer, approved to write EPMI coverage directly to Fannie Mae, which is required to transfer this risk to a panel of Fannie Mae-approved reinsurers (the "reinsurance structure"), or
- a traditional mortgage insurer that is also approved by Fannie Mae pursuant to the Private Mortgage Insurer Eligibility Requirements (PMIERs).
Under the EPMI policy, the term of coverage is 10 years, but the policy remains in effect for all loans that are delinquent as of the 120th month of the policy until they fully cure.
The process for settling EPMI claims is streamlined and similar to the process for settling claims under our CIRT transactions. If a loan defaults, claims are paid after property disposition when the actual loss on the loan is known. In addition, there is greater certainty in the amount of the insurance benefit with EPMI compared to claims paid under traditional MI policies, because EPMI insurance providers do not have discretion to disallow or limit certain expenses that may be curtailed under traditional policies. The EPMI benefit is calculated as the lesser of Fannie Mae’s actual loss or the maximum loan-level coverage due under the EPMI policy, expressed as a percentage of the sum of the defaulted loan balance, uncollected interest, and other expenses.
From an operational perspective, EPMI offers a more streamlined process for lender customers:
- EPMI acquisition: Fannie Mae is responsible for acquiring the insurance, filing claims, and performing monthly reporting.
- Loan eligibility: Loan quality and eligibility are determined by Fannie Mae, not a combination of Fannie Mae and MI guidelines.
- Servicing: Participating servicers look to one set of servicing guidelines – Fannie Mae's servicing guidelines – for their loss mitigation offerings, liquidation decisions, and related approvals.
- Operational processes: Because the operational processes required under EPMI are similar to those required for CIRT, Fannie Mae can leverage the simplified process and infrastructure that already supports CIRT transactions.
- Claim filing: When Fannie Mae files a claim under EPMI, it submits a single data report to the insurance provider rather than many origination and servicing file documents that are required under a traditional mortgage insurance policy.
- Settlement options: The claim is settled after property disposition when the actual loss on the loan is known. There is no need to offer the insurer the option to acquire the property, a settlement option permitted under LPMI and BPMI policies.
Comparing MI options
Both lenders and borrowers may realize improved execution with EPMI.
- For lenders, EPMI will reflect a competitive execution for loans with LTV ratios greater than 80%. Participating lenders of all sizes will be offered consistent terms and thus realize a level playing field.
- For borrowers, in some cases EPMI may offer a lower initial monthly payment than LPMI or BPMI, depending on the lender's product offering and the borrower's circumstances. However, unlike BPMI, which permits a borrower to lower their total mortgage payment through cancellation of the mortgage insurance (for example, when the LTV reaches 80% of the original property value), the cost of EPMI is embedded in the borrower note rate, which cannot be reduced as a result of paying down the mortgage or an appreciating property value.
With each of these options shown below, MI coverage is effective at the time the loan is delivered to Fannie Mae and is standard coverage 1.
|Buyer of MI||Lender||Lender||Fannie Mae|
|MI Premium Paid By||Borrower||Lender||Fannie Mae|
|Can a borrower lower their mortgage payment through cancelation of the MI?||Yes||No||No|
|MI cancellation provision||• Must be automatically canceled, e.g., when the LTV ratio is scheduled to reach 78% 2
• May be canceled by borrower based upon paydown of the loan or appreciation of the property value 2
|None – coverage exists for life of loan||None, although coverage is for a 10-year term|
|Length / term of coverage||Terminates upon cancellation (see MI cancellation provisions above)||Life of Loan||10 years, but the policy remains in effect for all loans that are delinquent as of the 120th month of the policy until they fully cure|
|Policy||Approved MI Companies, selected by borrower/lender||Approved MI Companies, selected by borrower/lender||Negotiated Policy, selected by Fannie Mae|
|Origination Guidelines||Fannie Mae and MI Guidelines||Fannie Mae and MI Guidelines||Fannie Mae Guidelines|
|Loan Quality Reviews||Fannie Mae and MI Guidelines||Fannie Mae and MI Guidelines||Fannie Mae Guidelines|
|Loan Performance Reporting||Servicer reports to MI and Fannie Mae||Servicer reports to MI and Fannie Mae||Servicer reports to Fannie Mae|
|Loss Mitigation and Property Disposition Approvals||MI and Fannie Mae Guidelines and Approvals required unless delegated||MI and Fannie Mae Guidelines and Approvals required unless delegated||Fannie Mae Guidelines and Approvals required|
|Claim Filing||Servicer files claims||Servicer files claims||Fannie Mae files claims|
Treatment in MBS and CRT
For now, lender deliveries using the EPMI option will be limited to whole loan commitments, although we hope to expand lender delivery options to include MBS sometime in the future. Additionally, although acquired through the whole loan commitment process, those loans will be pooled later into MBS and will also be covered by our credit risk transfer (CRT) programs. Given that CRT investors take on credit risk, we anticipate expanding disclosure to help investors understand which loans have EPMI coverage, how the EPMI benefit is calculated, and when the benefit is paid. As with all loans covered by primary mortgage insurance and included in a Connecticut Avenue Securities™ (CAS) or CIRT reference pool, Fannie Mae holds CRT investors harmless from any losses resulting from the financial inability of a mortgage insurance provider (including providers of EPMI) to pay their claim.
Initial roll-out of the EPMI option
The initial roll-out of the EPMI option was offered to a diverse, representative cross-section of large, medium, and small lenders that span a mix of geographies and business models, including independent mortgage banks, community banks, depositories, and more.
We are initially securing coverage pursuant to the reinsurance structure, testing lender and reinsurance counterparties' receptions to the offering. Over time, additional EPMI participants may include traditional mortgage insurers. Fannie Mae's choice of the EPMI insurance provider will not affect the experience or requirements of participating EPMI lenders, and lenders will generally not know which insurers will be writing coverage to Fannie Mae.
Like our CIRT execution, the EPMI reinsurance framework utilizes a licensed, dedicated insurance-writing entity that transfers 100% of its risk to a panel of reinsurers. Each participating reinsurer undergoes a thorough counterparty review in order to be approved by Fannie Mae, and the coverage allocation to each reinsurer for every EPMI transaction is determined by Fannie Mae. This initial roll-out is subject to a volume limit and participating lenders may deliver loans to us on or after August 1, 2018. This pilot will be evaluated and approved by the Federal Housing Finance Agency (FHFA) prior to any changes beyond the pilot phase.
Fannie Mae will continue to permit lenders to acquire BPMI and LPMI coverage for loans with LTVs greater than 80% and expects these products to remain the main credit enhancement vehicles for meeting our charter requirement on those delivered loans. For example, some borrowers may prefer the BPMI option to cancel their mortgage insurance once the loan LTV has sufficiently declined in lieu of a potentially lower total monthly payment with EPMI. The decision to use EPMI will remain with the lender and the borrower, based upon the lender's business model and the borrower's preferences.
EPMI is simply another option that aims to help our lender customers serve their borrowers and simplify their business processes. Fannie Mae's EPMI option supports our overall strategy to provide a simpler, more certain loan sale experience for our lender customers, while balancing the needs of all of our stakeholders to continue to improve the overall housing finance industry.
Fannie Mae's Mortgage Insurance Risk Sharing webpage will provide information on Fannie Mae's EPMI contracts in order to provide transparency to the market on these offerings.
Vice President for Credit Enhancement Strategy & Management
July 10, 2018
1 Refer to Fannie Mae's Selling Guide
2 Refer to Fannie Mae’s Servicing Guide