Mortgage Life Insurance

To cover loan risks and other contingencies, credit insurance has been developed. One common type is the debtor life insurance policy that is part of many mortgage contracts. If the debtor dies, the insurance company holding the policy pays the debt. Merchandise credit insurance for domestic buyers and sellers is sold only to manufacturers, wholesalers, and certain service agencies but not to retailers; it enables the creditor to recover a certain percentage of losses should the debtor become bankrupt. Export credit insurance is available to exporters against losses from both commercial and political reverses. For example, the supply of a company's imports from abroad could be cut off in time of war.

The only two AAA-rated mortgage insurance companies are lobbying hard to maintain a competitive advantage that their rating accords them under the new capital rule for Fannie Mae and Freddie Mac.The rule allows Fannie and Freddie to hold less capital for mortgages they insure through the two AAA-rated companies, GE Mortgage Insurance Corp. and United Guaranty Corp., providing an incentive, some critics say, for the mortgage giants to do business with them. The five other mortgage insurance companies hold AA ratings, and Fannie and Freddie would be held to higher capital requirements to do business with them. The rule was approved by the Office of Management and Budget in July and is scheduled to take effect in July 2002.

However, the Office of Federal Housing Enterprise Oversight has signaled that it is open to discussions on changing how the capital rule applies to mortgage insurers, and so the AAA-rated companies are mobilizing to maintain it as written.