Last Updated 4/5/2021
Issue: The financial crisis of 2007-2008 found private mortgage insurers (PMI) exposed on the front lines since their product is intended to provide protections to mortgage originators. As home prices plummeted, the wave of mortgage defaults and home foreclosures weakened mortgage insurers' capital position and resulted in substantial losses. As the economic and sector fundamentals improved, PMIs' performance had been trending upwards. Earnings of PMIs are expected to continue to benefit from these favorable macro trends over the next couple of years.
Overview: Private mortgage insurance, sometimes called default insurance, mortgage guaranty insurance, or mortgage indemnity insurance, dates back to the 1880s, when mortgage banks were first formed to finance loans to people securing land in the Midwest and West. Then as now, PMI promotes home ownership by facilitating the flow of credit from lenders and investors who might not otherwise have the capacity or desire to assume incremental credit risk. PMI enables those lenders to mitigate default risk when a borrower makes a smaller down payment, which inherently increases the risk of loss.
The housing collapse of 2008 placed significant strain on the PMI industry. Mortgage insurers' shift toward "affordability" products and subprime loans increased their exposure to the rise in mortgage defaults during the crisis. Following the difficulties during the crisis, PMIs are benefitting greatly, according to Standard & Poor's, from improving economic and housing fundamentals, and from the tightened underwriting of mortgage loans. As all the troubled vintages are winding down and are replaced with mortgages of higher credit quality, insurers are expected to show earnings over the next few years.
At the same time, there are still considerable competitive pressures which may affect PMI industry performance in 2019. Standard & Poor's noted in a recent report that PMIs with their improved balance sheets and primary operations are actively exploring ways to expand their presence-both within the GSE (government-sponsored enterprise) ecosystem and outside of it. PMIs have been trying to get a larger share of GSE business through participation in risk-sharing programs. In the third quarter of 2018, PMIs expanded their share in the primary mortgage insurance market because of a decline in VA (U.S. Department of Veterans Affairs) home loan guaranty activity.
In November 2019, Moody's changed its outlook on the U.S. mortgage insurance sector to stable from positive amid moderating economic conditions. In 2020, the PMIs had a sluggish start in the first few months of the COVID-19 pandemic, but recovered in the remainder of the year. According to the U.S. Mortgage Insurance (USMI), a trade organization that represents PMIs nationwide, the PMI industry logged a banner year in 2020, supporting more than 2 million low down payment borrowers of approximately $600 billion in mortgage originations, with 65% going toward home purchases and 35% to refinancing. The record-high volume in 2020 is attributed to low interest rates and historically low refinance rates.
Status: State insurance regulators are actively studying what changes are deemed necessary to the solvency regulation of mortgage guaranty insurers. The NAIC's Mortgage Guaranty Insurance (E) Working Group was formed by the Financial Condition (E) Committee in late 2012. This Working Group is drafting changes to the Mortgage Guaranty Insurers Model Act (#630) and other areas of solvency regulation of mortgage guaranty insurers.
In February 2013, the Working Group released a list of potential regulatory changes in which it identified the issues with mortgage guaranty insurance as it exists now. The primary problems are threefold:
- The overconcentration of mortgage originations in only a few banks has increased the pressure on mortgage insurers to accept everything given to them by any single bank or risk losing all the business from that bank.
- The cyclical nature of mortgage insurance means that periods of high profitability are followed by periods of varying duration of catastrophic loss.
- The lack of incentives to continue adhering to strict underwriting standards during booming periods when there is no threat of discontinued business.
In addition to the previously mentioned potential changes to the NAIC model and a new Risk Based Capital formula specific to Mortgage Guaranty Insurance, the following additional potential changes are being considered:
- The need for new reporting requirements that break out mortgage insurers' exposures to different levels of risk and are used as partial input into the minimum capital requirements.
- The need to prohibit captive reinsurance agreements between mortgage insurers and originating banks.
- The need to refer potential accounting issues to the NAIC's Statutory Accounting Principles (E) Working Group for further consideration as a longer term project than what the Working Group is focused on currently.
A revised draft of Model #630 is currently being developed to be finalized by the 2021 Spring National Meeting.
Committees Active on This Topic
Mortgage insurance: market structure, underwriting cycle and policy implications
August 2013, Final Report
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Sr. Manager, P/C & Title Financial Analysis