Wrangle Over $76 Billion in Mortgage Insurance

     MILWAUKEE (CN) – Mortgage Guaranty Insurance Corp., the nation’s largest private mortgage insurer, has a $535 million dispute with Freddie Mac over MGIC’s risks on $76 billion in mortgage insurance.
     MGIC claims Freddie Mac and its conservator, the Federal Housing Finance Administration, are not properly calculating the aggregate loss limit on 11 pool policies they purchased.
     “During 1998 and 1999, Freddie submitted an ever-larger number of loans for insurance under the eleven policies,” the complaint states. “As of June 30, 1998, the eleven loan pools included loans totaling approximately $35 billion in initial principal balances. By September 30, 1999, the combined IPBs of the loans insured under all eleven pool policies totaled $76 billion, with a weighted average loss limit of approximately 0.85 percent. After payment of modest losses in the initial years of the policies, the remaining combined aggregate loss limits of the policies – MGIC’s amount at risk – totaled approximately $647 million.”
     The large risk exposure constrained MGIC ability to write more insurance policies for Freddie Mac and others, so the two parties restructured the deals to get “new pool insurance capacity,” according to the complaint.
     The complaint states: “As agreed by the parties, each of the policies was amended by a substantively identical endorsement that (a) kept each policy separate, but replaced the eleven individual aggregate loss limits with a single, combined aggregate loss limit calculated by combining loans insured under each policy into one ‘mega pool’ for aggregate loss limit purposes; and (b) establishing the combined aggregate loss limit at the greater of (i) the ‘existing aggregate loss limit,’ calculated based upon the respective total initial principal balances and existing aggregate loss percentages for each of the policies, or (ii) 0.69 percent of the combined total initial principal balance of both loans ‘insured’ under the eleven pool policies and loans which ‘become insured’ under those policies.”
     MGIC claims that the “aggregate loss limit for a particular pool of loans insured under a policy decreases with termination of coverage for the pool under a policy.”
     But Freddie Mac claims the initial aggregate loss limit remains in effect until the last policies that provided coverage for the pools terminates – $535 million higher than MGIC’s interpretation.
     MGIC said that using Freddie Mac’s interpretation would more than triple its losses during a single financial quarter.
     In its complaint, MGIC says it “will more than exhaust the current remaining aggregate loss limit applicable to the mega pool as calculated by MGIC, but not as calculated by Freddie Mac. Thus, MGIC will very shortly begin denying claims that Freddie Mac asserts should be paid. Further, it is clear that in the coming months millions of dollars of additional claims will be submitted for payment under the policies, and for which MGIC believes no coverage exists.”
     MGIC claims Freddie Mac’s interpretation “leads to absurd results on multiple fronts.”
     First, it says, “had Freddie Mac believed this interpretation in 2007, it would have made no sense for it to insure loans under new pool policies rather than under the existing policies.”
     Second, it says the interpretation of the policies “leads to the entirely illogical result that the mega pool has a constant combined aggregate loss limit of over $1.3 billion for a period of more than ten years – from 2007 until 2018 – lasting many years after coverage has actually ceased for the vast number of individual loan pools at one time insured under the Policy.”
     MGIC said in a statement that it was open to a resolution outside of court: “That we took the initiative in seeking to resolve our dispute through the judicial system does not mean we cannot seek to resolve it ‘out of court.’ Indeed, we welcome the opportunity to continue such discussions, but could not accept the terms on which Freddie Mac was willing to do so,” MGIC said.
     “As Freddie Mac’s largest mortgage insurance counterparty, we place the highest value on the long and fruitful relationship between our two companies. We trust our attempt to seek resolution of this dispute through litigation will not affect that relationship. From our perspective, we intend to conduct ‘business as usual’ on the various matters between us and hope after due reflection Freddie Mac will concur this approach makes sense.”
     MGIC seeks declaratory judgment that affirms that the “intent and terms” of the 11 pool policies are that “the initial aggregate loss limit … ceases to count in calculating the remaining combined aggregate loss limit for the mega pool at such time as that pool of loans ceases to be insured, and further holding that MGIC may therefore deny all pending and future claims submitted by Freddie Mac once the remaining combined aggregate loss limit for the mega pool, calculated accordingly, has been exhausted.”
     MGIC says it had $169 billion primary insurance in force, covering 1.1 million mortgages as of March 31.
     It is represented by Thomas L. Shriner Jr. with Foley & Lardner, of Milwaukee, and John Millian with Gibson Dunn & Crutcher, of Washington, D.C.

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