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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?