Freddie Mac proposes insurance replacement

      Congress' rush to adjournment last week obscured behind-the-scenes fighting over an issue that could cut the monthly mortgage costs for millions of home buyers who pay for private mortgage insurance.
      The controversy, certain to attract attention in 1999, concerns a surprise move by secondary lending giant Freddie Mac to dispense with traditional mortgage insurance policies on some or all of the low-down payment mortgages it buys from local lenders. Freddie Mac officials believe that by using alternative forms of loss-protection on its mortgages, the company can save borrowers hundreds of millions of dollars a year that they now spend on traditional mortgage insurance.
      Most buyers who can't come up with a 20 percent down payment are charged for private mortgage insurance, which protects the lender from losses caused by borrower defaults or foreclosures. Typical premiums of $40 to $75 get tacked onto borrowers' monthly payments.
      Mortgage insurance is big business: Roughly 5 million homeowners pay premiums annually on $546 billion worth of home real estate. But Freddie Mac believes the cost to borrowers of mortgage insurance is too high. If the big two mortgage investors, Freddie Mac and Fannie Mae, were allowed to use alternative forms of default risk coverage on the 15 million insured loans they own, according to internal Freddie Mac estimates, about 4 million households would save $1.4 billion in premium payments every year.
      Even by conservative projections, the average Freddie Mac home buyer now paying mortgage insurance would save $324 a year using the alternative loss-protection plan the lending giant would like to initiate.
      About 60 percent of those who would save money are moderate-income, first-time purchasers. More than 670,000 are minority households, including nearly 185,000 blacks and 200,000 Hispanic families.
      Peter Zorn, director of financial strategy and policy analysisfor the lending company, said private mortgage insurance is overpriced, and particularly costly to lower-income minorities.
      Zorn said the solution is for lenders to create loss-reserve escrow accounts funded by borrower payments. The loss reserves would only be tapped when defaults or foreclosures required a payout. Borrowers would still be paying for loss-protection, but the cost of the protection, minus the organizational and regulatory overhead expenses passed on by insurance companies in their premium charges, "would be substantially less."
      Zorn said eight companies dominate the mortgage insurance field nationwide, and they show relatively little price variation in premiums within each state due to regulatory "price posting" requirements. He believes Freddie Mac "can do it more efficiently" and charge borrowers much less.
      Freddie Mac executives recently obtained a congressional go-ahead to use alternative loss-protection mechanisms in the closing moments of debate on a housing appropriations bill.
      But lobbyists for the mortgage insurance industry saw a threat to their business if one of the biggest users of insurance was allowed to dispense with it. They persuaded congressional leaders to rescind the approval, at least until hearings can be held in the next Congress.
      A spokeswoman for the Mortgage Insurance Companies of America, the trade group for the industry, said Freddie Mac's congressional charter specifically directs the corporation to use "third party" insurance to avoid possible costs to taxpayers. In a worst-case scenario, according to the group's Ellen Schweppe, Freddie Mac could suffer a $65 million loss over a five-year period if it used self-insurance.
      She said the industry "hasn't seen the details" of the program, and can't comment on what it might save consumers.
      However, Freddie Mac's regulatory agency, the Office of Federal Housing Enterprise Oversight, has seen the details and indicated in a letter to Senate Banking Committee Chairman Alfonse D'Amato, R-N.Y., that the program would not "adverse- ly affect the safety and soundness" of the lender.