The two government-sponsored enterprises (GSEs) in mortgage risk, Fannie Mae (OTCQB:FNMA) (the Federal National Mortgage Association) and Freddie Mac (OTCQB:FMCC) (the Federal Home Loan Mortgage Corporation), should be required to transfer some of the earthquake risk exposure they carry to the capital markets, according to a report.
The report from nonprofit, nonpartisan, public policy research organisation the R Street Institute, calls for the two GSEs to reduce the potential for a hit to a taxpayer, should a major earthquake strike.
The organisation highlights the significant lack of insurance coverage against earthquake property damage in the United States, noting that the issue is that earthquake insurance is not required to secure the collateral of mortgages owned or guaranteed by the GSEs.
We’d also note that private bank mortgages are also not typically subject to a requirement to have earthquake insurance protection, a failing for the banking industry and a potentially catastrophic taxpayer hit if a major quake catastrophe occurred.
R Street has estimated the total value of uninsured earthquake exposure held by the two GSEs as amounting to almost $205 billion.
They say that, in the event of a catastrophic earthquake event, Fannie Mae and Freddie Mac could leave homeowners with no protection for their mortgage loans, putting significant cost burden on government and taxpayers.
“Should a major earthquake strike in the United States – as is inevitable – Fannie Mae and Freddie Mac both would see the destruction of potentially billions of dollars in structures that serve as collateral for their mortgage portfolios and mortgage guarantees,” R Street explained.
R Street lays out the various options for the GSEs, from utilising insurance and reinsurance markets, to looking to the capital markets and structures such as catastrophe bonds.