Mortgage insurers have been cutting cash payment deals with lenders in exchange for turning a blind eye to bad underwriting practices. In the current economic crisis, this likely means the government will have to cover more and more losses. Fannie Mae and Freddie Mac, for example, own $160 billion of insurance that is now on the shoulders of federal banks. Professor David Reiss told Insurance Networking News: “It creates a situation where there’s the potential for arbitrage, where the private insurers and the lenders realize their nets will increase if they screw Fannie and Freddie.”
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