Tuesday, February 19, 2013

Reasons to Expect a Larger Share for PMI Industry

The role of private mortgage insurance (PMI) is set to grow. Independent initiatives by Congress, the administration, FHA, FHFA, and other government agencies have created and/or seek to create a housing finance system that would expand the role of PMI. Meanwhile, the return to normal household formation levels and pent up demand bode well for home purchase volumes. Money has flowed back into the industry: market insider Old Republic bought a minority stake in MGIC, Arch Capital bought the MI operating assets of bankrupt PMI Group Inc., and market leader Radian Group broke above $1B in market capitalization for the first time in two years. The following articles highlight major opportunities for market participants.

CoreLogic's recent Market Pulse newsletter said that rather than the 20% down payment baseline under the 2011 QRM proposal, "it is anticipated that the QRM rule, to be released by the end of Q2 2013, will impose a minimum down payment restriction of 10 percent." The study also shows the size of a 5% or lower down payments segment of the market, but not the 20% or lower segment. "Meanwhile, a bipartisan group of senators who drafted the language requiring the QRM rule in the 2010 Dodd-Frank Act wrote a letter to regulators yesterday urging them to drop a strict down-payment requirement."
This article sites broad-based support from the administration to Congress for aligning QRM with QM. Interestingly the article concludes with this: "Not everyone in the housing industry favors merging the two rules. Private mortgage insurers, which protect lenders against defaults on loans with down payments below 20 percent, stand to gain if the QRM rule allows its down-payment limit to be waived in some cases when the borrowers buy their coverage." Out loud, the PMI industry has been crying loudest for a reduction in the down payment requirement, becoming the only low down payment means of complying with the rules would create a boon the industry has never seen before. 

House Financial Services two early February hearings on FHA and Mortgage Insurance garnered broad, if not unanimous, bipartisan committee support for further curtailment of FHA and expansion of private mortgage insurance. In the hearing focusing primarily on FHA's health, Carol J. Galante, Commissioner and Assistant Secretary for Housing at FHA, testified that FHA is currently working to reduce it's underwriting share of the mortgage insurance market. Talk has grown around the idea of FHA-PMI risk sharing arrangements may create a new opportunity for PMI companies.

In his latest speech on December 8, 2012 Edward DeMarco, Acting Director of the FHFA, overseer of Fannie and Freddie, said "Also part of any transition are steps that FHFA is taking to contract the Enterprises’ operations – whether it is increasing guarantee fees or pursuing risk sharing alternatives. These initiatives have the potential to transfer some credit risk to the private sector, a goal that most policymakers seem to agree with." This followed comments on November 28th "As we seek to reduce the Enterprises’ long-term risk exposure and place them in a more stable financial condition, we are examining various methods of risk sharing, including the expanded use of mortgage insurance and securities structures that allow for private sharing of risk."

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