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Mortgage Insurers' Losses Mount
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The industry is also tightening its standards to avoid more losses on new loans. In parts of the country hit hard by the housing downturn, that means that a buyer must have a larger down payment, up to 10 percent, as well as a higher credit score. They will also pay higher mortgage premiums.
For a while, it seemed private mortgage insurers could become obsolete. During the housing boom, many borrowers avoided paying for mortgage insurance by taking out two loans, one that covered 80 percent of the purchase price and the second, a "piggyback," to cover the rest. That was considered a cheaper alternative to insurance premiums.
Facing competition, the industry began to provide insurance for subprime loans bundled by lenders and sold to investors, analysts said. The insurers lowered their underwriting standards to compete, they said.
"That to a great extent is where I would say their higher risk exposures came from," said Arlene Isaacs-Lowe, a senior vice president at Moody's Investors Service.
One of the industry's biggest challenges involves its relationship with Fannie Mae and Freddie Mac. The mortgage-finance giants often buy loans with a less than 20 percent down payment and then offset the risk with an insurance policy.
But after being downgraded by credit-rating agencies, several of the insurers fell out of compliance with Freddie and Fannie requirements to do business with them. Both have continued to treat the firms as if they met those standards despite the downgrades but say they are monitoring things closely.
"The current weakened financial condition of many of our mortgage insurance counterparties creates an increased risk that our mortgage insurer counterparties will fail to fulfill their obligations to reimburse us for claims," Fannie Mae said in an Aug. 8 Securities and Exchange Commission filing. During the first six months of this year, Fannie Mae received $830 million from its insurers, up from $547 million during the same period last year.
A strong relationship with Fannie Mae and Freddie Mac is critical to the industry's survival, Cecala said. "All you have to do is say they are no longer eligible to do Fannie, Freddie business and they are out of business," he said of the mortgage insurers' future.
