Freddie Mac told mortgage lenders to halt a practice that might buy them cover for making flawed home loans. In a letter to the industry Friday, government-owned Freddie Mac said its rules prohibit the practice, in which lenders pay cash to mortgage insurers in return for a promise they won’t rescind policies. Freddie Mac demanded that lenders and servicers disclose any such agreements.
“Our requirements aren’t changing. They’re being reinforced,” Freddie Mac spokesman Brad German said.
Freddie Mac relies on mortgage insurers to help it ferret out bad loans it has backed. When a policy is rescinded, for example because a lender submitted flawed or fraudulent paperwork, it triggers a repurchase request from Freddie Mac to the lender.
Companies including MGIC Investment Corp. of Milwaukee and Genworth Financial Inc. of Richmond sell insurance on home loans, paying lenders if the loans go into default. After three straight years of losses, the $759 billion industry has been investigating loans for flaws that allow it to revoke policies instead of pay out.
McLean-based Freddie Mac and Fannie Mae of Washington, which own or guarantee more than half of all U.S. home loans, require lenders to buy insurance on mortgages that have small down payments.
Last year, MGIC Investment said it had settled with a lender to halt policy rescissions in return for a payment. “The public interest is being hurt because the signaling function of the market is being sold out from under” Freddie Mac and Fannie Mae, said David Reiss, a professor at Brooklyn Law School in New York. For insurers, a settlement means “they’re getting some certainty” on potential liabilities.
MGIC spokeswoman Katie Monfre did not immediately respond to a request for comment. In the company’s 2010 year-end filing with the Securities and Exchange Commission, MGIC said it is discussing with other lenders “the possibility of entering into a settlement agreement.”
