Genworth Financial Inc. has made available the results of an independent study conducted by Promontory Financial Group which found that, among loans originated prior to the collapse of the housing bubble, low downpayment mortgages with mortgage insurance (MI) were significantly less likely to default during and after the housing crisis than uninsured low downpayment loans with a “piggyback” second mortgage.
The Promontory study, of nearly 5.7 million mortgages originated between 2003-2007, found that the cumulative default rate over six years for uninsured low downpayment loans with piggyback second mortgages was nearly 21 percent greater than for comparable loans with mortgage insurance. First mortgages with a simultaneous or piggyback second mortgage were the most prevalent alternative to the use of MI over the past decade.
Genworth requested the study to address the question raised by federal regulators responsible for defining the Qualified Residential Mortgage (QRM), as required by the Dodd-Frank Act, of whether MI contributes to a lower frequency of mortgage default. Promontory maintained full control over the research and conclusions in developing and conducting the study for Genworth.
“The Promontory study shows that mortgage insurance reduces the frequency of mortgage default, without exposing investors or the broader housing market to undue risk,” said James R. Bennison, CFA, senior vice president, U.S. mortgage insurance strategy and capital markets for Genworth. “Regulators should include loans with private mortgage insurance as an acceptable exemption to risk retention requirements under QRM, so this reliable private sector source of capital can continue to support the nation’s housing recovery through responsible lending to creditworthy borrowers.”
Promontory’s analysis simultaneously controlled for a variety of borrower and economic characteristics that might affect default rates, including loan type, unemployment levels, interest rates, and home price and equity fluctuations. The study reviewed third-party data from the CoreLogic Servicing database.
“Our analysis supports the assertion that, historically, loans with mortgage insurance have been associated with lower rates of delinquency or default when compared to non-insured first mortgage loans with a piggyback second mortgage,” said Eugene A. Ludwig, founder and chief executive officer of Promontory Financial Group.
Other factors the study took into account included borrower’s credit scores, combined loan-to-value ratio, loan purpose and documentation level. The study showed that, for each variable, low downpayment loans with MI had significantly lower delinquency rates than uninsured piggyback loans.
For purposes of the study, “low downpayment loans” were defined as those with combined loan-to-value ratios of more than 80 percent, and “insured mortgages” referred to loans with either private MI or federal forms of MI, such as loans backed by the Federal Housing Administration (FHA).