Mortgage Slang 101 – Mortgage Insurance, Brett Reichel,

Mortgage insurance is viewed nearly universally as a bad thing, but in reality, it’s a tool to be used that is very good for home buyers, the housing market and the economy in general.

Why do many complain about mortgage insurance?  Because it’s expensive, and sometimes difficult to get rid of when it’s no longer necassary.  If that’s the case, why do I say it’s good for buyers and the economy?  Because it’s a tool that allows people to buy a home with less than twenty percent down.

Mortgage insurance insures the lender against the risk of the buyers default on the loan.  It does NOT insure the buyers life, like many people think.

The single biggest hurdle for home buyers is accumulating an adequate down payment.  Lenders want buyers to put twenty percent down for two reasons.  First, a buyer with a large down payment is less likely to quit making their payments.  Second, if a buyer does default, the more the buyer put down usually means more equity in the house when the lender forecloses, which means the lender loses less money.

But, if a buyer wants to buy a $200,000 and has to put up a twenty percent down, that will equal a $40,000 down payment!  Hard to save up, for most buyers.  BUT, with the use of mortgage insurance, that buyer might be able to put as little as $6,000 down!  A lot easier to save.

So, mortgage insurance can be a very benficial tool.

With that being said, don’t let your lender shoehorn you into only considering monthly mortgage insurance.  There are other options such as single premium mortgage insurance, or “split” mortgage insurance.  These programs can be more expensive up front, but sometimes much less expensive over time.  They don’t work for everyone, but they certainly should be looked into.


Brett Reichel

Mortgage Guaranty Insurance — Market Collapsing, Insurers Next?, by Gavin Magor,

This week, President Obama announced that the Federal Housing Finance Agency (FHFA) would be extending the Home Affordable Refinance Program (HARP) to an estimated additional one million homeowners.  In practice what this means is that homeowners that have a Fannie Mae (OTCBB: FNMA) or Freddie Mac (OTCBB: FMCC) backed loan and owe more than 125% of the value of their home may qualify for a restructuring.

Mortgage insurers were pummeled by claims in the first half of the year, losing $2.4 billion in the six months through June–$618 million in the first quarter plus another $1.7 billion in the second quarter. The third-quarter numbers are not yet available; however, with no sign of significant improvement in the economy for the remainder of the year it appears that 2010 losses will be matched in 2011.


Gavin Magor, senior financial analyst at Weiss Ratings, has more than 25 years of international experience in credit-risk management, insurance, commercial lending and analysis. He leads the firm’s insurance ratings division and developed the methodology for Weiss’ Sovereign Debt Ratings.


Given the state of the mortgage guaranty market, will the insurers even be there to support these loans, or more broadly, any loans?

The mortgage guaranty industry is dominated by six insurance groups.  Subsidiaries of MGIC Investment Corporation (NYSE: MTG), Radian Group (NYSE: RDN), Genworth Financial (NYSE: GNW), PMI Group (NYSE: PMI), American International Group (NYSE: AIG) and Old Republic International Corporation (NYSE: ORI) wrote 93% of the $4.4 billion of premiums in 2010 with just five companies writing 80% of the total.

These same companies also recorded $1.7 billion or 71% of the combined $2.4 billion losses.  United Guaranty Residential Insurance Co (an AIG subsidiary) is the only large insurer that recorded a profit during 2010 and for the first two quarters of 2011.  Mortgage Guaranty Insurance Corp (MGIC) recorded a profit in 2010 after reserve adjustments.

Mortgage Insurance Companies of America, a group representing the major mortgage insurers, reports that new insurance written increased each month from April through August. It is this business that reflects an improved borrower profile according to the insurers and is expected to perform better than the pre-2008 policies.

On the downside, it reports that primary defaults have increased each month since March and the cure rate, reflecting the resolution of defaults, has declined as many months as it has improved, but the trend is down. A report from RealtyTrac on October 13 reported that first-time defaults rose 14% between July and September 2011 over the prior quarter.  Consequently, in-force insurance declined on a month-by-month basis, since February, down a total of $27.1 billion or 4.4% to $598.6 billion at the end of August.

Earned premiums dropped 7.9% during 2010, with the larger insurers dropping 9.1%.  With $3.5 billion out of the $4.4 billion of premiums earned by the largest insurers, only Radian Guaranty Inc experienced a rise in premiums, increasing 3.5%.  The remainder experienced declines anywhere from 6.4% to 21.6%.  

Capital and surplus reported by mortgage insurers dropped 7% from the first to second quarters of 2011, and $1 billion or 13% since December 2010. Assets declined $608 million or 2.3% between March and June.

Two substantial groups, PMI and Old Republic, wrote 24.6% of 2010 earned premiums but were forced to effectively withdraw from the market at the end of the third quarter of 2011. Two PMI subsidiaries were placed into receivership by the state insurance regulator.  One, PMI Mortgage Insurance Company, recorded 11.6% of the total mortgage premiums earned in 2010.

The market for mortgage guaranty paper has therefore shrunk. The line of business is not profitable at this stage for the majority of insurers. The concern is that the losses will continue to grow and, with limited growth in real estate sales requiring mortgage insurance, there will be additional withdrawals from the market and or potential failures.

Two of the largest mortgage insurers are Mortgage Guaranty Insurance Corporation (MGIC), a subsidiary of Mortgage Guaranty Insurance Corp. and Genworth Mortgage insurance Corporation (Genworth), a subsidiary of Genworth Financial Inc.  These two companies, ranking first and third respectively in market share, hold 35% of the market with Radian sandwiched in between. 

Despite the apparent similarities, they could not have more disparate approaches and confidence in the mortgage guaranty market. Both companies write only one line of business and both increased their market penetration in 2010, but the similarities end there.  MGIC represents 72% of the assets of its parent while Genworth only represents 2.5% of its parent and thus  is not the major focus of the group. This difference in relevance within each group is demonstrated in the contrasting approaches to the current market difficulties.

  1. MGIC slightly increased its market penetration during 2010, from 22.9% to 23.1%, despite a 7.3% fall in earned premiums from $1.1 billion to $1.02 billion. This increase did not translate into profits however. Only a $619 million release ofclaims reserves prevented a loss in 2010.  It’s noteworthy though that MGIC was profitable for each of the “Great Recession” years of 2007 to 2009.
  2. Although MGIC recognizes that the loan origination market is not growing, it contends that it is positioned to operate in the restricted market and that it is sufficiently capitalized to take advantage of the better quality business now available.
  3. Like MGIC, Genworth slightly increased its market penetration during 2010, from 11.7% to 11.9%, despite a 6.4% fall in earned premiums from $558.2 million to $522.6 million. Unlike MGIC it recorded losses in each of the years from 2008 to 2010.
  4. On the other hand, Genworth sees that the future of the mortgage insurance market lies in the regulatory and legislative actions taken to change the real estate market. It recognizes that there could be some industry consolidation.

What these two insurers appear to be demonstrating clearly is that whether the mortgage guaranty business is core to a group or not the odds are currently stacked against them because of the legacy business. 

Mortgage insurers have traditionally, like most property and casualty insurers, earned substantial income from investments. A drop in investment income should be expected to continue based on the current interest rate environment and bond pricing, drying up this revenue source

The investment dilemma is a challenge for all P&C insurers.  There is a growing reliance on investments for profits; at the same time there are reduced yields in the current investment environment. With unsustainable underwriting losses, insurers must navigate among undesirable alternatives:  1) seeking higher investment returns by purchasing riskier securities; or 2) increasing premiuns at the risk of dampening demand for mortgages

This is another area where MGIC and Genworth have differed. Genworth has increased its junk bond investments from 1.7% of its total portfolio in 2008 to 3.4% in 2010.  This is in line with the general trend among all P&C insurers. MGIC has, on the other hand, reduced its junk holdings which has resulted in an annualized decline of 21% in investment income putting additional pressure on the profitability of the main underwriting business.

Something has to give and, as we saw in the third quarter, both PMI and Old Republic International Corp were forced to stop writing new policies due to insufficient capital.  PMI is on the brink of collapse, and two subsidiaries were seized by the regulator in September. Despite opportunities to write more, and presumably profitable, business with a smaller competitive field it seems reasonable to assume that there will be additional insurers that withdraw from the market, are seized by regulators, or are sold. 

Genworth appears to be a prime example of a company in the wrong place at the wrong time and it could be jettisoned by its parent sooner rather than later.  MGIC on the other hand IS the business and appears to be girding its loins for the fight ahead, hoping that it will be able to successfully get through the unprofitable pre-2008 book of business and emerge stronger, with a profitable book of new business and positioned to take advantage of future recoveries in the housing market.


PMI to pay underwater borrowers to stay put by by Jacob Gafney,

Private mortgage insurer PMI Group (PMI: 1.34 -11.26%) will offer cash incentives to some homeowners in negative equity to help prevent mortgage defaults.

PMI subsidiary, Homeowner Reward is working with Loan Value Group, to administer the pilot program, called Responsible Homeowner Reward.

The program launched Monday and will start in select real estate markets where falling house prices left borrowers owing significantly more on their mortgage than what the property is worth.

Participation in RH Reward is voluntary and there is no cost to the homeowner, according to PMI. The cash will come after a lengthy period of keeping the mortgage current, generally from 36 to 60 months. According to PMI, the reward will be between 10 to 30% of the unpaid principal balance.

The Loan Value Group works “to positively influence consumer behavior on behalf of residential mortgage owners and servicers,” according to its website.

LVG programs already delivered more than $100 million in cash incentives to distressed homeowners. However, those programs focus on turnkey solutions such as cash for keys, with an aim to avoid principal forgiveness. The Homeowner Reward program is taking a different path.

“We continue to seek creative and effective loss mitigation strategies,” said Chris Hovey, PMI vice president of servicing operations and loss management. “PMI is especially supportive of homeownership retention efforts in states that are facing unprecedented housing challenges.”

Write to Jacob Gaffney.

Follow him on Twitter @jacobgaffney.