Mortgage Insurance Industry Touts Enhancements

“Private MI plays a critical role in facilitating homeownership for first-time and low- and moderate-income borrowers while shielding lenders, the government-sponsored enterprises (GSEs), and taxpayers from credit risk. The implementation of important enhancements over the past 15 years has made the private MI industry stronger and more resilient,” said Seth Appleton, president of USMI. “Not only does private MI provide stability to the housing market, but it is also very well positioned to meet borrower demand as proven by the more than 1 million Americans who relied on private MI in 2022 to purchase or refinance a home.”

The Urban Institutes’ 2023 “Mortgage Insurance Data at a Glance” report states that private MI “is highly effective in reducing losses to the GSEs,” as “the loss severity the GSEs experience is lower for loans with [private MI] than for those without because mortgage insurance recoveries reduce losses.” 

Reduces GSE Losses

The Urban Institute says, “During the past 66 years, the private mortgage insurance industry has enabled homeownership for more than 38 million borrowers who lack sufficient funds for a 20% down payment on a conventional mortgage.”

According to the report, total loss severity for the 1994-2022 origination period of GSE loans without private MI was 37.6%, while loans with private MI were 26.4%, meaning loans without private MI experienced a 42.4% higher rate of loss severity when compared to the loss severity rate of loans with private MI during this time period. Further, the Urban Institute’s report also found that mortgages backed by private MI have been the most common execution for low down payment borrowers since 2018.

The Urban Institute also looked at how private mortgage insurers have become increasingly proactive in managing and distributing credit risk. In 2015, the industry expanded its credit risk transfer capabilities and issued $298.9 million in insurance-linked notes (ILNs), covering $32.4 billion of insurance in force. By 2021, the annual issuance increased to $6.3 billion, protecting $652.2 billion in mortgage loans. 

Because of rapidly changing market conditions, ILN issuance dropped significantly in 2022 to $1.2 billion, protecting $41.4 billion in risk in force and $205.9 billion in mortgage loans. Since 2015, private mortgage insurers have executed 42 reinsurance deals, ceding $47.1 billion in risk on approximately $1.1 trillion of insurance in force using excess of loss (XOL) and quota share reinsurance (QSR) transactions. The bottom chart shows annual ILN volume issued by individual private mortgage insurers.

Among the enhancements to the industry in the last 15 years, USMI’s new report outlines and analyzes the following:

Private Mortgage Insurer Eligibility Requirements (PMIERs) – Since the 2015 revision to PMIERs, developed in partnership with the Federal Housing Finance Agency (FHFA) and the GSEs, private mortgage insurers now hold 69% more capital than the required regulatory threshold. USMI member companies have maintained levels significantly over the PMIERs capital requirements, and collectively hold $11 billion in excess of these requirements, representing a 169% sufficiency ratio.

New Master Policy – Implemented by USMI members on March 1, 2020, the policy increased clarity of terms and streamlined the payment of claims to ensure, in the event of borrower defaults, that private MI results in reliable and predictable payments to lenders. 

Rescission Relief Principles – Introduced in 2013 and revised in 2017, the Recission Relief Principles include automatic relief after 36 timely payments, with early relief available after 12 timely payments with a full file review. It also provides private MI companies with the ability to offer increased rescission relief.

MI Credit Risk Transfer (MI-CRT) Structures – Private MI companies have transferred nearly $73.8 billion in risk on more than $3.4 trillion of insurance-in-force (IIF). Further, after introducing MI insurance-linked-note (ILN) programs beginning in 2015, private MIs have issued 56 ILN transactions, transferring nearly $22.3 billion of risk on more than $2.3 trillion of notional mortgages.

Through the MI-CRT transactions, the industry said that demonstrates that private MI companies are sophisticated experts in pricing and actively managing mortgage credit risk, ensuring quality control and acting as a “second pair of eyes” on risk, which further cements the stability private MI provides in the housing finance system. 

For over 65 years, the private MI industry has served lenders, the GSEs, the U.S. government, and taxpayers as an effective and resilient form of private capital, standing as the first layer of protection against credit risk and mortgage defaults. Fifteen years after the 2008 financial crisis, the enhancements outlined above have been implemented and proven to further strengthen the industry. Since 1957, private MI has enabled affordable, low down payment homeownership for more than 38 million people. In 2022 alone, more than 1 million borrowers purchased or refinanced a loan with private MI, accounting for nearly $402 billion in mortgage volume. Nearly 62% of purchase loans with private MI went to first-time homebuyers, and more than 34% had annual incomes below $75,000.