Private insurers are considering a request by U.S. officials to guarantee mortgages for veterans — the fastest growing part of the market.
The Department of Housing and Urban Development is urging mortgage insurers that rely on Fannie Mae and Freddie Mac for business to offer supplemental protection for lenders to military members and veterans. Only 25% of VA loan amounts are backed by the Department of Veterans Affairs — a limit that keeps some firms from fully participating in the program, Ginnie Mae President Ted Tozer said.
As soldiers returned to America after more than 2.6 million served overseas since 2001, and the cost of Federal Housing Administration insurance jumped, the VA share of home lending has soared, accounting for almost 9% in the second quarter, at least a 20-year high. Insurers including American International Group Inc. and MGIC Investment Corp. are looking at these loans as their role in the mortgage market expands.
"It's something I’m definitely interested in exploring," Donna DeMaio, who runs AIG's United Guaranty mortgage-insurance unit, said in an interview at a Mortgage Bankers Association conference last week. "I'm really interested in new ways we can help produce access to credit."
The 25% cap on VA insurance "leaves a lot of small lenders awfully exposed and reluctant to offer veterans credit under this initiative," HUD Secretary Julian Castro said during his speech at the conference in Las Vegas. Getting another layer of protection would make them "feel confident when offering these loans — giving more of our nation’s heroes a chance to buy a home in the country they risked everything to protect."
When smaller lenders do offer VA loans, they often sell the servicing contracts to larger lenders to get rid of the default risk, said Tozer of Ginnie Mae, which guarantees $1.5 trillion of bonds mostly backed by FHA and VA loans. That leaves those smaller lenders with a diminished role in the VA market, reducing competition that can cut borrowing costs and limiting underwriting flexibilities.
Mike Frueh, director of the VA's loan guaranty service, said that while the 70-year-old program has about 1,500 firms making loans that it guarantees, the agency supports using extra insurance to draw in more. The reduction of lenders' money at risk, a key part of VA lending since its creation, would be addressed by the insurers wanting "to make sure they’re making a safe bet."
Robert Van Raaphorst, a spokesman for the Mortgage Bankers Association, said that the group couldn’t yet comment on the idea.
VA lending, which doesn't require a down payment, has expanded as the U.S. draws down troops after more than a decade of combat in Iraq and Afghanistan. The VA has also taken business from FHA after that agency, which guarantees loans with down payments as low as 3.5%, increased the cost of its insurance to rebuild its depleted fund.
VA loans accounted for about $26 billion or 9% of mortgages made in the second quarter, up from 7% in all of 2013 and less than 2% a decade ago. The loans were used to finance 8% of all home purchases in the three months through September, an increase from 4% in the three months through May 2010.
Higher FHA insurance premiums are also pushing borrowers to get loans from government-controlled Fannie Mae and Freddie Mac. They require loans with less than 20% down payments to carry mortgage insurance that covers the initial losses.
FHA borrowers must now pay as much as 1.35 percentage point in annual mortgage-insurance premiums, along with an upfront fee of 1.75% of the loan balance. Prior to October 2010, borrowers paid an annual amount of 0.55%.
"As more business shifts to the private market and away from the FHA," the mortgage insurers are benefiting, MGIC Chief Executive Officer Curt Culver said on an Oct. 15 conference call with analysts.
The industry backed 14% to 15% of new loans last quarter, he said. That’s up from less than 5% in 2009 and 2010.
"As private capital we certainly would like to explore as many ways as possible to prudently participate in the housing recovery and expansion," including supplemental VA loan insurance, Mike Zimmerman, a spokesman for Milwaukee-based MGIC, said in an email.
Whether the company expands into the VA market and generates adequate returns depends on issues including the level of capital that will be required under pending changes to Fannie Mae and Freddie Mac rules and state requirements, he said.
Radian Group Inc. is "interested in offering insurance on government mortgages both VA and FHA, but our participation will depend on the terms and structure," Emily Riley, a spokeswoman, said in an email.
The potential "incremental" profit opportunity depends on what kind of margins would be possible, said Jason Stewart, an analyst at Compass Point Research & Trading LLC. Some of the mortgage insurers may not have enough spare capital at this point in time to even entertain the idea, he said.
"It's a good thing to explore," Stewart said.
After surging in 2013, mortgage insurer shares have struggled this year amid slowing home sales and the potential for tighter rules for the industry. Shares of MGIC, which tripled last year, have gained 0.2% since Dec. 31 to $8.46. Radian is up 8.6% to $15.34 this year, after more than doubling in 2012 and again the following year.
Insurers formed after the housing market crashed in 2008 have also suffered. Shares of Essent Group Ltd. are down 3.2% in 2014, while NMI Holdings Inc. has slumped 32%.
Insurers, which have seen little demand since the financial crisis to back loans that banks hold on their books, probably can get additional business from Fannie Mae and Freddie Mac as more borrowers learn to avoid higher FHA fees, NMI Chairman and CEO Brad Shuster said in an interview. His firm wants to hear more about the VA opportunity, seeing it as a "potential expansionary measure," as he said.
"It's an interesting idea, it’s certainly one we’re exploring," said Adolfo Marzol, an executive vice president at Essent Guaranty Inc.
