PMI Directed to Stop Insuring Additional Home Loans; Impacts on GSE and OHCS Existing Loans Not Clear.

WSJ story is HERE. Yahoo info on company is HERE.

I don't fully understand impact of action on existing loan guarantees, including those on loans held by the GSE's or originated by Oregon Housing and Community Services and other state housing finance agencies. 

Suffice it to say that I can't imagine that it bodes well for the ability of the company to pay claims on existing loans that turn sour.

I would suggest readers stay tuned for future developments, including any information about the impact from the GSE's or OHCS. 

Recent Oregon DBCS Waiver Rendered Moot.

Readers may recall that last year I posted story [HERE] about additional authority Oregon DCBS had been granted to waive capital requirements for private mortgage insurance companies without any public notice. I learned recently that Oregon's DCBS had done so for PMI though December 2011;  but I expect the Arizona regulator action Friday will render that recently granted Oregon waiver moot.

Originally created and posted on the Oregon Housing Blog.

Harney Says FHA Still Better Than Private Mortgage Insurance for Many Buyers.

Summary of nationally syndicated housing columnist Kenneth Harney's column in LA Times HERE: 

Although it has raised fees, the FHA continues to offer much higher and more flexible maximum debt-to-income ratios, far more generous underwriting and lower down payments than conventional lenders.

Originally created and posted on the Oregon Housing Blog.

Largest Private Mortgage Insurance Company CY 2010: Continued Losses, 21% of All Insurance Written Was HAMP.

Housing Wire has summary for MGIC HERE.

Buried at end of story is $ 3.2 billion HAMP insurance volume, which works out to 21% of total insurance written: 

New insurance written for the full year 2010 was $12.3 billion compared to $19.9 billion in 2009. HARP activity for 2010 totaled an additional $3.2 billion.

Originally created and posted on the Oregon Housing Blog.

Private Mortgage Insurance Company Stocks Decline.

Bloomberg story HERE. Says stock of second largest PMI, Radian, declined by 20% because of higher than expected losses.

Table from story HERE shows industry wide totals by month for last year. Looks to me like May 2010 new business for private mortgage insurance industry of $4.8 billion was 42% less than $6.9 billion May 2009 volume. 

In reading through company and investor comments appears that PMI's are anticipating that changes in FHA premium structure will help increase their market share. 

Originally created and posted on the Oregon Housing Blog.

Oregon Legislature Passes Bill Allowing Behind the Curtain REDUCTION in Risk Capital Requirements for Private Mortage Insurers.

Sometimes you just have to wonder.....

The Oregon Senate passed yesterday a bill that had already passed the House and will now be on its way to the Governor for signature. HB 3654A essentially allows the Director of the Oregon Department of Consumer and Business Services to unilaterally water down private mortgage insurance company capital, reserve and surplus requirements to a level BELOW the currently required 25 to 1 ratio. (A House amendment to the original bill permits this to happen WITHOUT any administrative rule making).

The logic of the REDUCTION in ratios is explained in the Oregon House legislative summary HERE.

... while current economic conditions demonstrate the need for private mortgage insurance (PMI), these same conditions are driving higher claims rates and in some states, are putting companies at risk of not being able to write new business although they are sufficiently capitalized to meet all of their policyholders’ claim obligations. The statutory restriction prevents flexibility needed for regulatory entities to adjust risk-to-capital ratio requirements to meet market needs.

While the bill passed unanimously in the House, 6 Senators voted against it:Ferrioli, Girod, Kruse, Shields, Whitsett, Winters.

Editorial Comment: At a time when greater transparency and increased capital requirements for financial firms are the order of the day, the Oregon Legislature caved in favor of behind the scenes "flexibility" and reduced capital requirements. (The House argument for "market needs" was the same excuse made for sub prime loan products).

Originally created and posted on the Oregon Housing Blog.

Private Mortgage Insurance Companies Get Lump of Coal for Christmas With Credit Rating Downgrade.

Housing Wire has story HERE.

Originally created and posted on the Oregon Housing Blog.

7 Private Mortgage Insurance Companies Put on Downgrade Watch.

WSJ story HERE.

(Editorial comment: About three weeks ago, PMI trade group rep was offering their "expertise" to Congress; maybe Congress should take a pass and also avoid any future request for bailout help? [Earlier post HERE]).

Originally created and posted on the Oregon Housing Blog.

FHA Reserves Sufficiency Hearing Testimony from Today.

HERE is consolidated file (166 pages) I constructed with all the prepared testimony for today's scheduled House Financial Services hearing on the sufficiency of FHA reserves.

I could not ignore piece of the self serving (and laughable) testimony from the private mortgage insurance industry representative:

"The percentage of MI originations has declined from 14.7% in the first quarter of 2008 to 4.3% during the second quarter of 2009. This has primarily been due to the mortgage insurers changing credit guidelines and adjusting pricing to properly address the current market risks...... the MI industry is WILLING TO BRING ITS EXPERTISE to FHA and to Congress so that we can work together on a solution to ensure the existence of a robust mortgage market."

My [editorial] translation of what private mortgage insurance companies are saying:

We have "adjusted our pricing" including "changing [our] credit guidelines" so well that we have 4% of the current market. Let us tell you how to reduce the appeal of the FHA product (which currently has 20%+ market share) and red line individual sub markets like we have now done so that we can compete.
Like health insurance companies, private mortgage insurance companies don't want to compete with the public sector. We are ENTITLED to get back to the 20% +market share that WE used to have when we grabbed market share by underwriting mortgage insurance on all the junk loan products of the recent past. P.S. We will also push for subsidies, but let's call them tax breaks or let's use some other kind of bailout fund source so they are not as obvious as the direct appropriations that government agencies require.

Originally created and posted on the Oregon Housing Blog.

As I Projected Last Month, A Private Mortgage Insurer is Stiffing Fannie/Freddie.

Housing Wire story HERE.

I think I saw this coming with my prior Mortgage Insurance Zombie post from exactly a month ago, HERE.

With Private Mortgage Insurance Credit Ratings in Decline, are the GSE's Propping up "Zombies"?; Should PMI be Dropped from HASP Loans?

As I have previously posted HERE Moody's has recently downgraded the ratings for several private mortgage insurance companies and is looking at the impact of these downgrades on state housing finance agencies, including Oregon's.

Since Fannie and Freddie also use private mortgage insurance for loans above 80% loan to value I decided to look more closely at how much exposure the GSE's have to potential credit losses if private mortgage companies fail to pay claims.

I focused on Fannie and found:

1. Fannie says that they have a maximum of $118.7 Billion in single family mortgage credit insurance in their guarantee book of business in place as of December 2008; that's ONLY 4% of their total guarantee book of business. Fannie also says at the end of 2008 they had $1.2 Billion in receivables from private mortgage insurance companies (See 2008 10k form, page 192 HERE).
   
2. Moody's expects that private mortgage insurance companies rated at A3 will have the ability to pay 40% of the claims presented for an Aaa bond. For companies rated Baa1 or below, the expected claims paying ability for an Aaa rated bond drops anywhere from 30% to zero.
3. Unfortunately, Fannie has only one private mortgage insurance company with a rating of A 3, United Guaranty Residential Insurance Company. That company provides only 14% of the coverage provided by private mortgage insurance companies for Fannie.
4. This means that the remaining companies provide 86% of the private mortgage insurance coverage for Fannie and all of those companies are rated in the B tier of ratings, OR they are unrated.

With the federal government providing an "effective" full faith and credit guarantee it is possible that these weakened credit ratings for private mortgage insurance companies will have no impact on the ratings of Fannie debt.

The GSE regulator recently issued a letter HERE to the private mortgage insurance industry organization indicating that existing PMI would NOT be dropped on GSE loan refinances, but the letter does not directly address PMI on loan modifications.

This raises a second question. If the market is using the "effective" full faith and credit rating of the federal government instead of the claims paying ability of private insurers as a factor in rating Fannie debt, would it be LESS EXPENSIVE (for the government and borrowers) to NOT require the continuation of private mortgage insurance on loans refinance or modified under the upcoming HASP program? (Since for HASP loan modifications,PMI would possible/likely be a partially government funded cost that will be factored into getting borrower down to 31% debt to income ratio).

Put differently, is the borrower paying for a cost now that won't provide significant benefit to the government and, will the government end up paying a portion of those costs for the borrowers to get the debt ratio down to 31% for a modified loan?

I don't have an answer to these questions.

I am wondering what YOU think about the pros and cons of continuing to require private mortgage insurance on HASP modified loans, refinances, or for that matter any Fannie loan, if the likelihood of Fannie collecting claims payments is already significantly diminished?. If ultimately the payout will be the same AND at least the government would be collecting the mortgage insurance premiums, would net government costs be less if mortgage insurance was switched to FHA or RD?

Bottom Line: Is the government propping up "Zombie" private mortgage insurance companies by keeping private mortgage insurance in place on Fannie Mae refinanced or modified loans, when the likelihood of those companies continuing to fully pay claims is in serious doubt?

If you have some thoughts drop them in the comment box below.

OHCS Single Family Bond Program: 1. Only FHA and RD Credit Enhancements Permitted; 2.Submitting Data to Moody's for Bond Rating Review.

I attended the State Housing Council meeting today (The agenda for meeting is HERE).

During the meeting staff announced three significant developments related to the single family Oregon bond program.

1. Future loans must have either FHA or Rural Development mortgage insurance--private mortgage insurance will no longer be permitted.
2. OHCS staff are assembling information to submit to Moody's as part of a credit rating review process. Staff indicated it is possible that the rating for agency bonds could be downgraded.
(One of my posts from last week HERE, has more background about the problems with HFA's and private mortgage insurance].
3. The outlines of a subprime refinance mortgage program are in place. A couple of key points from my notes. A. Loans must be either FHA or RD insured, and B. loans will be limited to borrowers with incomes below 80% median family income. The program will be available on a pilot basis but ONLY when and IF the bond market improves.

OHCS Single Family Bond Program Likely Impacted by Moody's Drop of MGIC Credit Rating to Junk Level.

The latest bond report from OHCS HERE (pg 7) shows that about 20% ($219 Million) of the principal balance of their SF revenue bond loans had private mortgage insurance from Mortgage Guaranty Insurance Corp.

Yesterday Moody's cut the rating of that company from A 1 to Ba2. As the story HERE indicates, that is a cut to a junk bond rating level. (Ratings of several other private mortgage insurance companies were also cut; total private mortgage insurance is 25% of the principal balance of OHCS SF revenue bond loans).

Moody's published in December 2008 an explanation of how it evaluates the strength of private mortgage insurance on HFA bonds , titled Methodology Update: Incorporating Private Mortgage Insurance in Housing Finance Agency Single Family Housing Program Bond Ratings. (Available from Moodys.com, with a free subscription).

In that explanation the assumed support level (claims paying abiility) of a A 1 rated private mortgage insurance company ranged from 60% for a Aaa HFA rated SF bond to a 100% assumed support level for a Baa rated bond.

IF the private mortgage insurance rating dropped below Baa3 this would drop the assumed private mortgage insurance support level (claims paying ability) to ZERO, regardless of the bond rating.

I am not sure what options are available to OHCS in the near term, but unless I find some new information, my assumption is that this downgrade could have a very significant impact not only here in Oregon, but around the country.

At a minimum this will accelerate the flight to FHA insured loans and their greater protection against possible loss. ( I wish I were more confident in the institutional ability of FHA to propertly scale their operations and control loan underwriting in this challenging environment).