Fitch expects more GSE losses due to partial MI claims payments [Mortgage Banking]

New York-based Fitch Ratlings said on Nov. 4 that Freddie Mac's reported $4.4 billion third-quarter loss was "partly driven by a reduction of mortgage insurance [MI] recoveries." The rating agency predicted that both Freddie Mac and Fannie Mae would see their future results "continue to be negatively affected by additional deterioration in the mortgage insurance industry."

In its press release, Fitch referred to the seizure by insurance regulators in October of the PMI Group Inc., Walnut Creek, California, in the aftermath of sustaining major losses stemming from the subprime lending crisis. Fitch noted that PMI Mortgage Insurance Co. is under exclusive control of the Arizona department of insurance. The mortgage insurer is paying just 50 percent on its claims. Fitch said.

And PMI is not alone in its financial troubles. "Fitch thinks other insurers remain vulnerable, posing additional threats to GSEs [government-sponsored enterprises]," according to the Nov. 4 press release.

Fitch anticipates that mortgage insurers may be forced to make additional haircuts on payments to the GSEs as homeowners continue to default. The rating agency noted that the current AAA long-term issuer default ratings (IDR) enjoyed by the GSEs "are based on strong government support," implying that if you take away the government support of Fannie and Freddie, there is considerable financial weakness in the two companies.