Mortgage Insurance Woes Grow for Fannie, Freddie

Housing Wire ^ | April 2, 2009 11:03 AM CST | Paul Jackson

[Centurion2000]

http://www.housingwire.com

Mortgage Insurance Woes Grow for Fannie, Freddie

Posted By PAUL JACKSON
April 2, 2009 11:03 am

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Imagine paying full premium for an insurance contract, and receiving only 60 percent on any claim you make — that’s the unsavory situation now being faced by both Fannie Mae ([1] FNM: 0.7011 +3.10%) and Freddie Mac ([2] FRE: 0.76 +2.70%), as well as a bevy of private-market lenders, on their mortgage insurance contracts with troubled mortgage insurer Triad Guaranty Inc. ([3] TGIC: 0.265 +40.36%).

The insurer, which put itself into run-off and ceased writing new mortgage insurance policies in the middle of last year, [4] said late Wednesday that it had received a corrective order from its regulator, the Illinois Director of Insurance, limiting its payout on claims to 60 percent. The remaining 40 percent of a claim will essentially take the form of an IOU, or a deferred payment obligation (DPO), meaning the lender/investor will not immediately be able recover the full amount of its claim.

Which means one thing: get ready for loss severities to go up, as servicers recover less on a growing number of bad loans. Especially so if other mortgage insurers are eventually forced to follow Triad’s lead, as some analysts say they expect.

For the GSEs, the pain of the change at Triad is likely to be immediately felt. More than half of Triad’s roughly $17 billion risk-in-force is written on mortgages held or otherwise guaranteed by Fannie and Freddie; Bank of America Corp. ([5] BAC: 7.27 +3.12%) and Wells Fargo & Co. ([6] WFC: 15.41 +6.42%) are the insurer’s largest private market customers, Triad CEO Ken Jones told reporters on a call Thursday morning.

In a frequently asked questions document, Triad noted that policyholders will still be required to pay the full premium, since “Triad is recognizing its entire claim obligation at the time of the claim through the cash payment and DPO, with the intent of paying the DPO amount in the future.” But when that future is seems pretty uncertain, to say the least: the future payment on the DPO can only occur when the insurer’s regulator sees the insurer achieve specified minimum surplus balances and risk-to-capital ratios. It’s unclear how a company that is not bringing in new revenue via new policies can be expected to bolster its level of capital.

“Continuing volatility in the housing and mortgage markets, as well as the overall economy, make it very difficult to forecast Triad’s future financial position with certainty,” the company said Wednesday evening. Auditors slapped the insurer with a ‘going concern’ warning for its 2008 financials earlier in the year, as well.

“This is regulated highway robbery,” said one senior banking executive, who said he expected the move and expects to see more. “Banks and others depending on MI to mitigate some losses now have to at least ask themselves ‘what is the likelihood my insurer decides or is forced to cut my claims coverage?’” It’s a question that auditors may also ask, he said, in terms of estimating a bank’s exposure to bad loans.

In February, Moody’s Investors Service [7] downgraded all mortgage insurers over concerns with capital adequacy amid a worsening U.S. housing market.

Write to Paul Jackson at [8] paul.jackson@housingwire.com.

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Article printed fromHousingWire || financial news for the mortgage market: http://www.housingwire.com

URL to article: http://www.housingwire.com/2009/04/02/mortgage-insurance-woes-grow-for-fannie-freddie/

URLs in this post:
[1] FNM: http://finance.yahoo.com/q/ks?s=FNM
[2] FRE: http://finance.yahoo.com/q/ks?s=FRE
[3] TGIC: http://finance.yahoo.com/q/ks?s=TGIC
[4] said late Wednesday: http://www.tgic.com/dpo.php
[5] BAC: http://finance.yahoo.com/q/ks?s=BAC
[6] WFC: http://finance.yahoo.com/q/ks?s=WFC
[7] downgraded all mortgage insurers: http://www.housingwire.com/2009/02/17/moodys-slashes-mortgage-insurers/
[8] paul.jackson@housingwire.com: mailto:paul.jackson@housingwire.com

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Copyright © 2008 Housing Wire. All rights reserved.

[Centurion2000]

This is going to get ugly fast. So basically you are on the hook for full payments but only get 60% of your insurance if disaster strikes.

“This is regulated highway robbery,” said one senior banking executive,

[KarlInOhio]

It looks like this is for the much hated PMI (private mortgage insurance) which you had to pay if you had less than 20% down when you bought a house. A lot of the mortgage funny business was set up so that the bank could make that money instead of the insurance company, so you only had 80% on your first mortgage (thus avoiding PMI) but you had a second mortgage right away for 10%, 15% or even 20% of the house's value.

It's not the same as property insurance.

[Nathan Zachary]

Mortgage insurance is yet another scam people are FORCED to buy, yet get nothing from. Unless your one of those who makes a lot of claims till your premiums end up higher than your mortgage payments, LoL!

Anyways, risk is risk, so why can’t the risk begin and end with the mortgage company? If an un-insured house burns down, big deal. In the grands scheme of things, that doesn’t impact the mortgage issuer very much. I thought that “risk” was built in to the amount of interest you pay.

[nufsed]

IIRC the rate of the insurance (PMI) is fixed and does not fluctuate over the life of the loan.

Also, you can refi when you're better than 80% LTV and get rid of the PMI, but then you're paying some more loan fees to refi.

[Nathan Zachary]

I never did understand why the mortgage-ee had to pay for the banks mortgage insurance. Never will I guess. But neverthe less, anyone who gets a mortgage pays that fee, then has to go out and buy property insurance to cover the bank yet again...

[nufsed]

Here's my read. The bank is charging mortgage insurance because they decided to let you put less than 20% down. It takes better credit (again) usually to get a higher LTV, but then they slap the insurance fee on you to hedge their risk.

Property insurance is required by the bank, but you pick the insurance company and it protects the house and what happens on the property, not the mortgage.

[LTCJ]

I didn’t think it was necessary to refinance to drop the PMI. It’s it sufficient to demonstrate >20% equity?

[LTCJ]

Emm, drop the “P”. IIRC, the “PMI” is a one-time fee (”P” = Prepaid). The “MI” is the recurring charge up to a 20% equity level. Correct???

[nufsed]

I'm unsure of that. My boss (wife) is out and she's the loan wizard. Maybe someone here can pick it up.

Have you done that?

[Mashood]

PMI= Private Mortgage Insurance. Required if Loan to Value of the mortgage is more than 80%.

[nufsed]

She who must be obeyed is home.

My wife tells me that you can contact the lender and get the mortgage insurance removed if the LTV gets to 80% or less. You can submit comps yourself and make your case or the bank may do a desk appraisal for no fee, or they may send an appraiser at your expense. The latter is the least typical.

[LTCJ]

Thanks folks. It's slowly coming back to me. "Prepaid PMI" vs recurring PMI payments.

Then I was correct in remembering a full-blown refinance wasn't required to drop the PMI.

[Mashood]

Typically, once the mortgage is brought down to 80% or below, a letter to your mortgage lender requesting deletion of the PMI should suffice.

[LTCJ]

Hmmm. In this day and age I wonder if the line is at principle = 80% of the loan amount or principle at 80% of the apprased value.

[NEMDF]

I agree; I think the PMI could be dropped when you had 20% equity.

[Freedom4US]

PMI?? Extinct, correct??? Nary a peep. Interesting.

[SunkenCiv]

Let’s hope so!

[csmusaret]

You are correct, but a lot of people lost large amounts of equity in the housing downturn so they are stuck even after paying for several years.

[Mashood]

Conventional loans extinct? About the only game in town (purchases) are the government loans. PMI is still available but hasn’t been prevelent since the widespread use of the popular 80/20 loans... something/anything to avoid PMI.

[Blue_Ridge_Mtn_Geek]

“Mortgage insurance is yet another scam people are FORCED to buy, yet get nothing from.”

What you got was the loan with less than 20% Down. If you had the 20% down payment, no MI was required. So, either get your rich uncle to cosign your loan (accepting full responsibility for the debt if you default), or hire the MI to take his place, or come up with the 20% down payment and stop whining.

In the middle and late period of the recent mania, lenders were able to flim-flam Fannie and Freddie into buying “20% down, no MI” loans originated simultaneously with a subordinate mortgage loan for up to the entire “down payment”, allowing the borrower into the house with thin to zero equity. The subordinate loans in these “Piggy Back” loan transactions were securitized and sold to gullible investors (perhaps your life insurance or pension fund investment managers plunged into them, or your bond mutual fund).
http://www.reuters.com/article/2007/03/02/us-usa-economy-housing-idUSN0260840120070302
http://www.thewriterscoin.com/2010/02/17/buying-a-home-pmi-vs-piggyback-loan/

Those investments in uninsured loans where the borrowers started out with little to no equity have lost the investors a lot of money. The risk could be disguised with a bit of chicanery but it couldn’t be eliminated. Add in a large number of homes purchased with loans to borrowers who didn’t have the means to keep up the payments and you have over a decade of substantial overbuilding stimulated by the availability of easy money, and an eventual plunge in real estate values when the music stopped and many of those financially strapped borrowers stopped making their payments. Thus, even prudent borrowers in neighborhoods where they were surrounded with reckless borrowers or fraud artists who lied their way into a loan they couldn’t repay, have been suffering the consequences of careless lending.

Since 2007, mortgage insurers have paid out over $22 billion in claims, and raised more capital to support insurance on many additional new loans. Now that FHA has been required to raise its rates to levels that will support future claim payments, and tighten its underwriting standards somewhat, private MI has become more competitive. Further declines in home prices appear likely for a while, and several more MI’s may be forced into runoff eventually, however lenders who issue new loans non-fraudulently, and don’t misrepresent their risk characteristics, can insure them with considerable confidence that claims on default of such loans will be paid in full.

http://www.housingwire.com/2011/03/04/report-details-hud-failures-to-protect-fha-insurance-fund-from-bad-loans
http://www.housingwire.com/2011/02/15/fha-to-increase-mortgage-insurance-premiums-a-quarter-of-a-point

http://www.housingwire.com/tag/mortgage-insurance

Incidentally, back in 2006, and even earlier, the private MI’s were warning regulators that they were missing the boat on their primary responsibility of safety and soundness of their regulated institutions. Did they listen? In a way: “Your comments are noted. We think the banks know what they’re doing. Thanks for the input. Don’t let the door hit your butt on the way out.”

Seot 20, 2006
http://www.privatemi.com/news/testimony/20060920.cfm
March 10, 2000
http://www.fhfa.gov/webfiles/1996/29RBC_NPR2_MICA.pdf
http://www.fhfa.gov/webfiles/1993/26RBC_NPR2_GE_Capital_Mortgage.pdf
September 29, 2010 (my favorite, a kind of “We Told You So” recital):
http://financialservices.house.gov/Media/file/hearings/111/Sinks%20Testimony%207-29-10%20w%20charts.pdf