Mortgage Insurance Basics - Casualty Actuarial Society | Casualty

60 Pages·2009·0.81 MB·English

Mortgage Insurance Basics
Ken Dailey, FCAS, MAAA
Casualty Loss Reserve Seminar
September 15, 2009
What is Mortgage Insurance
(MI)?
1
Mortgage Insurance (MI) is a type of credit insurance
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where a mortgage lender/investor is insured against a
loss from a default by the borrower. Borrower pays
the premium
MI is usually purchased when the borrower puts less
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than 20% down
Fannie Mae / Freddie Mac require MI or some other
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form of credit enhancement when purchasing a low
down-payment loan
There are 8 mortgage insurers in the market today.
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All are currently feeling the effect of the mortgage
crisis with higher loss ratios and reductions to capital
Nuances of Mortgage
Insurance
2
MI is a capital intensive line. Until recently, a
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mortgage insurer would typically write $1 of premium
per $3 of capital. Ratios have increased lately
Policy term is unknown at time loan is originated.
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Averages about 5-6 years
Contagion – risks are highly correlated. Adverse
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economic conditions affect many borrowers
simultaneously
Claim sizes are relatively small. Typical claim size is
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$50k and a $200k claim is rare. Frequency drives
results.
Loss emergence not uniform over life of policy
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Short tailed reserving. Most delinquent loans are
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resolved within 1 year to 18 months. (Though in the
mortgage crisis this has slowed)
MI Terminology
3
NOD – Notice of Delinquency. Occurs when a loan servicer
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notifies a mortgage insurer that an insured loan is in arrears.
Does not necessarily mean there will be a mortgage insurance
claim
Cure – An NOD that has been rectified without a mortgage
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insurance claim. Usually occurs when the borrower brings the
loan current or pays off the loan entirely
NIW – New Insurance Written = Original loan amounts on new
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policies written
Risk – Coverage $ provided on insured loans
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Subprime – no generally accepted definition, but refers to
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borrowers or loans that are more likely to default and is usually
based on credit score
Alt-A – Loans that are not subprime but have provided
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“alternative” documentation, or no documentation, of income or
assets. Often the borrowers income has not been verified by the
lender
MI Delivery Channels
4
Primary Mortgage Insurance
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Flow – Loans delivered and insured one at a time.
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Premiums determined from filed rate sheets
Bulk – Many loans insured though a single deal or delivery.
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Each loan priced separately with final rates set through a
bidding process
Pool Mortgage Insurance
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Many loans insured through a single pool policy. Rates
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determined through a bidding process. All loans given
same premium rate
Commonly have aggregate deductibles and stop loss
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thresholds
Mortgage Insurance Rates
5
Many factors are considered in setting MI rates, but
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base rates generally focus on the % of the loan
balance that is covered and the Loan-To-Value (LTV)
ratio
A common LTV / coverage combination is 90% / 25%
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The premium rate is expressed in terms of basis
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points (0.01% of loan balance). For instance, a typical
rate may be 0.75% of the loan balance annually.
MI premiums may be incorporated in the borrowers
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total mortgage payment or paid separately
Rates do not change during the life of the policy and
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the policy cannot be cancelled by the insurer, except
for non-payment of premium
The Claim Process
6
If a borrower defaults and the lender forecloses and
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takes title to the property, then there may be an
insurance claim
Mortgage insurer generally has the option to
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Pay the entire loan balance and expenses to the lender and
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take title to the property
Lender retains title and pay the lesser of
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Actual losses plus expenses (accrued interest, legal and
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maintenance)
Coverage percentage of the loan balance plus expenses
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Example:
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Loan balance = $200,000, Expenses = $20,000
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Coverage = 25%
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Claim Payment = 25% x (200,000 + 20,000) = $55,000
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Captive Reinsurance
7
The most common reinsurance mechanism for
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mortgage insurance has been captive
reinsurance
Lender typically reinsures loans they originate
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(or service) through a captive insurance
company affiliate. Sometimes quota share,
but mostly excess of loss basis
Aggregate excess threshold is established for
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all loans originated in a policy year
Mortgage insurers now receiving material
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reinsurance benefit from this coverage
Risk Factors that Drive Losses
8
Economic factors – unemployment and home
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price appreciation
Borrower credit quality
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Documentation of income or assets
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Size of down payment (LTV)
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Type of loan (fixed rate, ARM, 2nd lien, interest
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only, etc.)
Loan purpose (owner occupied v. investor
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property)
Capital Issues Facing MI
industry
9
Recent losses for mortgage insurers have
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restricted their ability to write new business
States have various restrictions on capital
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Contingency reserve limits dividend to
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policyholders
25-to-1risk/capital limitation in many states
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MPP = Minimum Policyholders Position
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establishes a minimum capital threshold to write
new business