An Introduction to Private Mortgage Guaranty Insurance 2003 CAS Annual Meeting New Orleans, LA John...
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Transcript of An Introduction to Private Mortgage Guaranty Insurance 2003 CAS Annual Meeting New Orleans, LA John...
An Introduction to Private Mortgage
Guaranty Insurance
2003 CAS Annual MeetingNew Orleans, LA
John Gaines, FCAS, MAAAVice President – Structured Transactions
Agenda• What is mortgage insurance (MI)?
• Types of mortgage insurance.
• Industry overview.
• Coverage and exposure.
• Claims.
• Cancellation.
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
Insured Mortgages
VA
GovernmentInsured
Private MortgageInsurance
FHA
Types of Mortgage Insurance
• FHA Insurance – 100% Coverage
• VA – Limited Guaranty
• Private MortgageInsurance – Limited Guaranty
Distribution by Dollar Volumeof Insured Mortgages
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
1999 2000 2001 2002
VA FHA Private
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).
Industry Overview
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
• Monoline.
• Contingency reserve.
• Minimum 25:1 risk-to-capital ratio.
• Limit on maximum risk coverage per loan.
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.
MI Industry Loss Ratios
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
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)• 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 ofSecondary Markets
• Existing mortgages bought, sold, and traded.
• Ensures availability and uniformity of mortgage credit.
• The GSEs.
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.
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)
• 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.
$100,000 value
20% down
$80,000loan amount
80% LTV
5% down
$95,000loan amount
95% LTV
Defining Risk • Lender’s exposure:
– Degree of risk the lender faces.– Without mortgage insurance, lender is
exposed to 100% of risk.
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.
CoverageHow MI Reduces Lender Exposure
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
$110,000
17% MI 25% MI
Purchaseprice
Purchaseprice
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
• LTV – size of the down payment.• Potential for property appreciation/depreciation.• Borrower’s credit history.• Loan purpose.• Loan type.• Loan term.
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.
Understanding Claims
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.
Questions?