"Amid their many problems, Fannie Mae and Freddie Mac also are contending with woes in an industry that is supposed to help reduce their risk: morgage insurance. ... 'They [MGIC, PMI and RDN] do have a depth of capital, and they should be able to continue paying claims,' said Dan Kelly, director of mortgage-insurer relations for Freddie. ... In a May filing with the [SEC], Fannie spelled out the dilemma. If it stopped doing business with some insurers and couldn't find alternative protection, Fannie said, it 'may be restricted' in buying home loans with low down payments. 'This restriction could negatively impact our competitive position and our earnings,' it said", WSJ, 11 July 2008.
Mortgage insurance is another smoke and mirrors industry. What did buying "insurance" accomplish that charging the borrower a higher interest rate wouldn't have? With less overhead.
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