Mortgage insurance: market structure, underwriting cycle and policy implications
August 2013, Final Report
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Sr. Manager, P/C & Title Financial Analysis
Last Updated 3/13/17
Issue: The financial crisis of 2007-2008 found private mortgage insurers (PMI) exposed on the front lines since their product is intended to provide protections to mortgage originators. As home prices plummeted, the wave of mortgage defaults and home foreclosures weakened mortgage insurers' capital position and resulted in substantial losses. As the economic and sector fundamentals have improved, PMIs' performance has been trending upwards. Earnings of PMIs are expected to continue to benefit from these favorable macro trends over the next couple of years.
Overview: Private mortgage insurance, sometimes called default insurance, mortgage guaranty insurance, or mortgage indemnity insurance, dates back to the 1880s, when mortgage banks were first formed to finance loans to people securing land in the Midwest and West. Then as now, PMI promotes home ownership by facilitating the flow of credit from lenders and investors who might not otherwise have the capacity or desire to assume incremental credit risk. PMI enables those lenders to mitigate default risk when a borrower makes a smaller down payment, which inherently increases the risk of loss.
The housing collapse of 2008 placed significant strain on the PMI industry. Mortgage insurers' shift toward "affordability" products and subprime loans increased their exposure to the rise in mortgage defaults during the crisis. Following the difficulties during the crisis, PMIs are benefitting greatly, according to Standard & Poor's, from improving economic and housing fundamentals, and from the tightened underwriting of the mortgage loans originated after the crisis. As the troubled vintages are winding down and are replaced with mortgages of higher credit quality, insurers are expected to show earnings over the next few years. At the same time, there are still considerable competitive pressures which may come affect performance in 2017. Standard & Poor's noted in a recent report that PMIs with their improved balance sheets and primary operations are actively exploring ways to expand their presence-both within the GSE ecosystem and outside of it. PMIs have been trying to get a larger share of GSE business through participation in risk-sharing programs as the GSEs are gradually increasing the amount of credit risk transferred every year.
Status: State insurance regulators are actively studying what changes are deemed necessary to the solvency regulation of mortgage guaranty insurers. The NAIC's Mortgage Guaranty Insurance (E) Working Group was formed by the Financial Condition (E) Committee in late 2012. This Working Group is drafting changes to the Mortgage Guaranty Insurers Model Act (#630) and other areas of solvency regulation of mortgage guaranty insurers.
In February 2013, the Working Group released a list of potential regulatory changes in which it identified the issues with mortgage guaranty insurance as it exists now. The primary problems are threefold:
In addition to the previously mentioned potential changes to the NAIC model and a new Risk Based Capital formula specific to Mortgage Guaranty Insurance, the following additional potential changes are being considered:
A revised draft of Model #630 is currently being developed.