Freddie Mac said the new rules restrict how much risk insurers can lay off to lenders via complex arrangements where lenders and insurers share risk on pools of loans bundled under separate trusts. The new rules will keep mortgage insurers from creating such arrangements on more than 25 percent of the total new gross insurance premiums they write.
In essence, the new Freddie rules force mortgage insurers to keep money on hand for claims, instead of giving some back to the trust under the terms of these so-called "captive reinsurance" deals. In such deals, the insurers place insurance on a pool of loans packaged by the lender, but then give some of the premiums they receive back to the trust in exchange for the lender taking on some of the risk if any of the loans default.
Freddie Mac said the cap is aimed at allowing mortgage insurers to retain more insurance premiums to pay current claims and increase their capital reserves.
Customers use private mortgage insurance when they cannot make a traditional 20 percent down payment on a home. The insurer covers any principal and interest if the borrower falls behind on payments.