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An Introduction to Private Mortgage Guaranty Insurance. 2003 CAS Annual Meeting New Orleans, LA John Gaines, FCAS, MAAA Vice President – Structured Transactions. Agenda. What is mortgage insurance (MI)? Types of mortgage insurance. Industry overview. Coverage and exposure. Claims.

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an introduction to private mortgage guaranty insurance

An Introduction to Private Mortgage Guaranty Insurance

2003 CAS Annual Meeting

New Orleans, LA

John Gaines, FCAS, MAAA

Vice President – Structured Transactions

agenda
Agenda
  • What is mortgage insurance (MI)?
  • Types of mortgage insurance.
  • Industry overview.
  • Coverage and exposure.
  • Claims.
  • Cancellation.
what is mortgage insurance
What is Mortgage Insurance?
  • What it is.
    • Protects lender against loss.
  • What it is not.
    • Mortgage life insurance.
    • Mortgage disability insurance.
types of mortgage insurance
Types of Mortgage Insurance

Insured Mortgages

Private Mortgage

Insurance

Government

Insured

FHA

VA

types of mortgage insurance1
Types of Mortgage Insurance
  • FHA Insurance – 100% Coverage
  • VA – Limited Guaranty
  • Private Mortgage

Insurance – Limited Guaranty

private mortgage insurance
Private Mortgage Insurance
  • Protects insured against loss in the event of borrower default.
  • Generally required on original loan amounts greater than 80% of the appraised value or purchase price, whichever is less.
  • A private sector alternative to government-insured mortgage loans (FHA / VA).
pmi industry history
PMI Industry History
  • Roots go back to the late 1800s in NY.
  • The Great Depression wiped out the entire PMI industry (>50 companies).
  • The modern industry was founded in 1957 upon stringent statutory rules.
statutory requirements
Statutory Requirements
  • Monoline.
  • Contingency reserve.
  • Minimum 25:1 risk-to-capital ratio.
  • Limit on maximum risk coverage per loan.
private mortgage insurance providers
Private Mortgage Insurance Providers
  • AIG - United Guaranty Corp.
  • GE Mortgage Insurance Co.
  • Mortgage Guaranty Insurance Corp.
  • PMI Mortgage Insurance Co.
  • Radian Guaranty, Inc.
  • Republic Mortgage Insurance Co.
  • Triad Guaranty Insurance Corp.
industry income statement 2002 millions
Industry Income Statement – 2002($ Millions)
  • Net Premiums Earned $3,836
  • Losses 832
  • Expenses 899
  • U/W Income 2,104
  • Operating Income 2,913
industry balance sheet as of 12 31 02 millions
Industry Balance Sheet (as of 12/31/02 - $ Millions)
  • Admitted Assets $19,761
  • UEPR 451
  • Loss Reserves 2,025
  • Contingency Reserves 12,789
  • Policyholders Surplus 3,273
  • Risk-to-Capital Ratio 11.03:1
importance of secondary markets
Importance ofSecondary Markets
  • Existing mortgages bought, sold, and traded.
  • Ensures availability and uniformity of mortgage credit.
  • The GSEs.
importance of secondary markets cont
Importance ofSecondary Markets (cont.)
  • Private mortgage insurance allows mortgages to be sold on secondary market.
  • Home loan funds would be severely strained if mortgages were not sold on secondary market.
slide17
GSEs
  • The charters of Fannie Mae and Freddie Mac require primary MI or the lender to take a recourse position on loans with original LTV’s greater than 80%.
  • The amount of primary MI depends on the loan program and underwriting feedback from Fannie Mae and Freddie Mac.
loan to value ratio ltv

20% down

80% LTV

$80,000

loan amount

Loan-to-Value Ratio (LTV)

5% down

  • High LTV = greater risk of default.
    • Homeowner has less to lose.
    • Homeowner has less financial stability.
    • Property does not have enough equity to cover drops in value and costs of selling.

95% LTV

$95,000

loan amount

$100,000 value

defining risk
Defining Risk
  • Lender’s exposure:
    • Degree of risk the lender faces.
    • Without mortgage insurance, lender is exposed to 100% of risk.
defining risk cont
Defining Risk (cont.)
  • Coverage:
    • Determined by Fannie Mae, Freddie Mac, and private conduits.
    • Different investors require different amounts.
    • If not indicated, lenders often order required amounts by secondary investors in case loan is sold at a later date.
coverage how mi reduces lender exposure
CoverageHow MI Reduces Lender Exposure

Purchase

price

Purchase

price

Loan amount

(90% LTV)

Loan amount

(90% LTV)

74.7%

exposure

67.5%

exposure

Lower coverage =

higher exposure

Higher coverage =

lower exposure

major factors of default risk
Major Factors of Default Risk
  • LTV – size of the down payment.
  • Potential for property appreciation/depreciation.
  • Borrower’s credit history.
  • Loan purpose.
  • Loan type.
  • Loan term.
understanding claims
Understanding Claims
  • Upon foreclosure, the mortgage insurer either:
    • Pays 100% of the claim amount and takes title for subsequent sale.
    • Pays percentage of claim amount based upon the coverage, and lender retains property.
  • Lender’s Master Policy specifies amounts included in claim.
  • Loss mitigation.
mi cancellation
MI Cancellation
  • Until 1998, MI cancellation was the lender/investor’s responsibility.
  • Homeowner’s Protection Act of 1998:
    • MI automatically canceled when LTV ratio reaches 78% or less of original value.
    • Borrowers with good payment histories may initiate cancellation at 80% LTV ratio.
    • MI company is to refund any unearned premium within 30 days after notification of cancellation.