Mortgage Insurers Jockey to Stand Out in Contract Overhaul
New federal requirements for private mortgage insurers aim to standardize coverage across the market. That's left some companies looking for ways to distinguish their products as they vie for lenders' business.
Some insurers are touting faster relief for lenders from the threat of having policies rescinded for underwriting defects. Other carriers are marketing easy-to-read policy summaries. Fundamentally, however, the new master policies contain the same elements—making an already homogeneous market even more so.
"For the most part, mortgage insurance is a commodity," says Jason Stewart, an analyst at Compass Point Research and Trading. "There is very little price differentiation in the market."
Starting on Oct. 1, mortgage insurers will be required to have in place updated master policies—their umbrella contracts with mortgage lenders—as part of a broader industry overhaul by the Federal Housing Finance Agency.
The FHFA is the regulator and conservator for Fannie Mae and Freddie Mac, which require private mortgage insurance on any loans they buy where the borrower has put down less than 20% of the home price.
The agency in December established “aligned requirements” for insurance coverage across the industry, designed to address issues that surfaced during the housing crisis.
As part of the overhaul, insurance companies were required to file updated insurance policies with Fannie and Freddie, and to get approval from state insurance regulators.
In particular, the updates address standards for rescission. When the new guidelines take effect, all insured loans purchased by Fannie Mae and Freddie Mac must have in place a standardized legal framework that spells out when, and under what circumstances, a policy can be revoked.
"It's a huge change," says Meghan Bartholomew, senior vice president for risk management at Radian. Her company’s previous master policy did not include rescission timelines, she says.
Rescission is a concern for lenders because if an insurer yanks a policy, Fannie or Freddie could make the originator buy back the loan (although this is no longer automatic as it was during the downturn). A primary goal of the FHFA overhaul was to make sure all insurance policies contained guidelines for dealing with contested claims.
"We've learned our lessons from the crisis," says Theresa Cameron, associate general counsel at United Guaranty, referring to the gaps in insurers' master policies that led to legal battles during the housing crash. "Taking someone's word for something isn’t going to get you to where you want to be."
Most of the master policies that have been approved by the government-sponsored enterprises, which are posted on the insurers' websites, contain little variation in the area of rescission relief for mortgage lenders.
Six of the seven companies in the market—MGIC, Radian, Genworth, Essent, Arch MI and United Guaranty—have incorporated the GSE-mandated 36-month sunset for policy contestability. That means the insurers promise that coverage can't be revoked after three years, provided that a borrower has made consistent, timely payments.
Additionally, the insurance companies will offer an optional 12-month rescission relief policy. To qualify for the shortened timeframe, loans will be required to undergo an additional underwriting review and submit post-closing documentation.
Radian, for instance, will "do its own independent review of the origination file and closing file, making sure that it was underwritten properly," says Bartholomew.
The new policies provide the housing finance market with an additional layer of credit security, says Stewart.
"What we've seen is that [the mortgage insurers'] underwriting process acts like a quality control check for originators," he says.
Lenders will see little variation in rescission relief options in particular, says Steve Thomson, vice president of risk management at MGIC.
"You can't say [insurance policies] are identical, but the general application is identical," he says. "So really it boils down to the execution underneath the policy."
But one of the newest players in the field, National MI, has seized the industrywide rewrite as an opportunity to set itself apart from the pack.
"A good analogy: BMW and Yugo are the same in that they are both cars, but there is a lot of variation between the two," says Claudia Merkle, executive vice president for insurance operations.
The company will offer 12 months of rescission relief on all loans, which it pitches as "two years sooner than the industry standard of 36 months."
The company touts its shorter rescission window as a source of cost savings to lenders, saying in promotional materials that its policy can "eliminate buyback risk" sooner than competitors' policies.
The company handles the additional insurance risk that comes with a 12-month rescission window by taking a close look at the loans it insures, Merkle says. "When we look at a loan, we provide a guarantee with the underwriting of the file, so we can't push back during the servicing," she says.
National MI's master policy also provides simplicity to aggregators and lenders, says Merkle, since they "won’t have to worry if there’s a mixed bag of coverage."
In a field where uniform pricing and policy coverage are the norm, these differentiators may provide National MI with a slight advantage.
"It's not huge, and it's not going to last forever," says Stewart, the analyst, adding that the market may eventually adopt a standard rescission relief timeframe of 18 months.
In addition to rescission relief, the new FHFA overhaul aimed to reduce ambiguity in the marketplace.
United Guaranty has emphasized clarity in its new master policy as a distinguishing factor. The insurer—a unit of the conglomerate AIG—has introduced what it calls a "policy commitment letter," a regularly updated, signed document which summarizes the key provisions of United Guaranty's contracts with lenders.
"Think of it as a dynamic document," said Kurt Smith, head of insurance risk management at United Guaranty. "Any changes [to the underlying policy] become an amendment to the commitment letter," easily accessible to both parties.
The letter "clarifies some of the things we might have gone back and forth about with phone calls and emails," says Cameron, the United Guaranty counsel.
United Guaranty describes the letter on its website as an "innovative addition" that it added above and beyond the GSE requirements.
About 75% of United Guaranty's lender customers have signed a policy commitment letter, Smith says. He expects nearly all lenders to sign it before the Oct. 1 deadline.