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2003 CAS Annual Meeting Private Mortgage Insurance Industry Update. Presented by: Kyle Mrotek, A.C.A.S., M.A.A.A. New Orleans, LA November 12, 2003. May 22, 2001. Private Mortgage Insurance (PMI) Industry Update. Activities Reinsurance, Bulk Transactions, GSE’s Regulatory

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2003 cas annual meeting private mortgage insurance industry update

2003 CAS Annual MeetingPrivate Mortgage Insurance Industry Update

Presented by: Kyle Mrotek, A.C.A.S., M.A.A.A.

New Orleans, LA

November 12, 2003

May 22, 2001

private mortgage insurance pmi industry update
Private Mortgage Insurance (PMI) Industry Update
  • Activities
    • Reinsurance, Bulk Transactions, GSE’s
  • Regulatory
    • Taxes, RESPA Reform, GSE Reform

Milliman USA

slide3

PMI Industry UpdateActivities

Reinsurance

  • Catastrophe protection
  • Captive reinsurance
    • Banks and mortgage lenders establish captive reinsurance companies
    • Captive reinsurers assume mortgage insurance risk on loans originated by lender and affiliates

Milliman USA

slide4

PMI Industry UpdateActivities

Reinsurance (cont.)

  • Captive reinsurance (cont.)
    • Captive mortgage reinsurance is only about 10 years old
    • Captives typically monoline like primary companies
    • Isolated trust for each cedant
    • Much growth, both in captive counts and premium ceded

Milliman USA

slide5

PMI Industry UpdateActivities

Reinsurance (cont.)

Milliman USA

slide6

PMI Industry UpdateActivities

Reinsurance (cont.)

Source: Schedule F

Milliman USA

slide7

PMI Industry UpdateActivities

Reinsurance (cont.)

Milliman USA

slide8

PMI Industry UpdateActivities

Reinsurance (cont.)

  • Captive reinsurance (cont.)
    • Typically aggregate excess of loss contracts
      • Example: Reinsurer assumes layer 5% excess 5% of coverage for 25% of written premium
    • Quota share contracts exist too, but less frequent

Milliman USA

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PMI Industry UpdateActivities

Reinsurance (cont.)

  • Captive reinsurance (cont.)
    • Cede trends
      • Began relatively small (e.g., layers of coverage for 15%-16% of written premium)
      • Trended to deeper cedes (e.g., layers of coverage for 35%-40% of written premium)

Milliman USA

slide10

PMI Industry UpdateActivities

Reinsurance (cont.)

  • Captive reinsurance (cont.)
    • Cede trends (cont.)
      • More recently, industry leaders announce intent to reduce cede %’s
        • Reasons cited
          • Risk/reward balance, and
          • Profitability objectives

Milliman USA

slide11

PMI Industry UpdateActivities

Bulk Transactions

  • Loan-level coverage written on pools of loans, often for securitization market
    • Reporting of bulk transactions beginning 3rd quarter 2001, so little history available.
  • Large portion of involvement based on subprime loans (source: Inside Mortgage Finance)
    • Analysts keeping close eye on bulk losses

Milliman USA

slide12

PMI Industry UpdateActivities

Bulk Transactions (cont.)

  • Bulk business as percent of MI industry’s new insurance written
    • 12% for 2nd half, 2001
    • 16% for 2002
  • MGIC, UGC, Radian and PMI bulk primary MI market leaders
    • Bulk primary MI in 2002
      • MGIC represents 25%
      • UGC represents 19%

Source: Inside Mortgage Finance

Milliman USA

slide13

PMI Industry UpdateActivities

Government Sponsored Enterprises (GSE’s)

  • Fannie Mae (formerly known as Federal National Mortgage Association)
  • Freddie Mac (formerly known as Federal Home Loan Mortgage Corporation )

Milliman USA

slide14

PMI Industry UpdateActivities

GSE’s (cont.)

  • Fannie Mae and Freddie Mac
    • Quasi-governmental agencies
    • Publicly owned corporations
    • Represent roughly half of secondary mortgage market
    • Compete against each other, as well as other entities
      • Enjoy implied governmental backing, so lower borrowing rates

Source: Residential Mortgage Lending

Milliman USA

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PMI Industry UpdateActivities

GSE’s (cont.)

  • GSE Regulation
    • Office of Federal Housing Enterprise Oversight (OFHEO) regulates Fannie Mae and Freddie Mac
    • OFHEO established by Department of Housing and Urban Development (HUD) in 1992

Source: OFHEO website

Milliman USA

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PMI Industry UpdateActivities

GSE’s (cont.)

  • OFHEO’s mission - ensure the capital adequacy and financial safety and soundness of Fannie Mae and Freddie Mac
    • Funded through assessments to Fannie Mae and Freddie Mac, so not funded by taxpayers

Source: OFHEO website

Milliman USA

slide17

PMI Industry UpdateRegulatory

Taxes

  • Tax deductibility of PMI
    • Mortgage insurance premiums proposed to be tax-deductible from federal income taxes
    • Deduction to apply to homeowners whose adjusted gross income is $100,000 or less
    • Argument is MI premium should be tax deductible because lenders, not homeowners, benefit from MI

Source: Inside Mortgage Finance

Milliman USA

slide18

PMI Industry UpdateRegulatory

Taxes (cont.)

  • Tax deductibility of PMI (cont.)
    • Expected to allow “some 300,000 families, who now rent, to qualify for a mortgage” (American Homeowners Association)
    • Predicted tax savings up to $700 on $135,000 loan (Milwaukee Journal Sentinel)
    • MI industry in favor to “help level the playing field for private mortgage insurers against 80-10-10 loans” (Inside Mortgage Finance)

Milliman USA

slide19

PMI Industry UpdateRegulatory

Taxes (cont.)

  • Tax deductibility of PMI (cont.)
    • Bi-partisan provision introduced March 2003, but cut by President Bush in final version of tax bill in June 2003

Milliman USA

slide20

PMI Industry UpdateRegulatory

RESPA Reform

  • RESPA – Real Estate Settlement Procedures Act (current version since 1992)
    • Purpose: To inform borrowers of the costs associated with their loan and loan closing
    • Requires lender to provide borrower with good faith estimate of the settlement costs
    • Prohibits kickbacks and unearned fees
    • Reason for some disclosure documents received during loan closing process

Source: Residential Mortgage Lending

Milliman USA

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PMI Industry UpdateRegulatory

RESPA Reform (cont.)

  • RESPA reform proposed
    • Provides safe haven from anti-kickback and unearned fees provision for Guaranteed Mortgage Packages (GMP)
      • Packaging could save consumers in closing costs
    • Imposes tolerance levels in good-faith estimates
    • Stipulates lender-paid mortgage broker compensation as credit to borrower

Source: Mortgage Banking, February 2003

Milliman USA

slide22

PMI Industry UpdateRegulatory

GSE Reform

  • Treasury and HUD want Treasury to assume from HUD regulatory role of GSE’s
  • HUD interested in maintaining authority of establishing affordable housing goals

Milliman USA

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PMI Industry UpdateRegulatory

GSE Reform (cont.)

  • OFHEO too small to effectively oversee actions of GSE’s
    • Freddie Mac underreported earnings by $4.5 billion over 3 years
    • Fannie Mae committed “computational error” of over $1 billion
    • GSE’s have looser disclosure standards than other publicly traded firms

Milliman USA

slide24

PMI Industry UpdateRegulatory

GSE Reform (cont.)

  • Parties for reform (i.e., lenders, banks)
    • Lower borrowing costs (implied government backing)
    • GSE’s enjoy too many benefits not permitted to competitors (Over $2 billion emergency crisis line of credit)
    • Operating leverage too high, could compromise economy if default (less stringent risk-based capital standards)

Milliman USA

slide25

PMI Industry UpdateRegulatory

GSE Reform (cont.)

  • Parties against reform (i.e., GSE’s)
    • Provide savings to consumer in borrowing costs (according to Congressional Budget Office, 25 basis points)
    • Provide liquidity for securitization market
  • Finalization of reform not expected before year-end

Milliman USA

slide26

PMI Industry UpdateClosing Remarks

  • Large political involvement
  • Industry constantly evolving

Milliman USA