Mortgage insurers on a mission to rebuild trust
It's been nine years since the first of three major failures of private mortgage insurance carriers during the financial crisis, the result of widespread foreclosures that decimated capital reserves across the entire business.
Those that survived relied on regulatory waivers to continue writing new policies. Two legacy players were able to successfully raise funds to support their operations. And amid the chaos, new entrants came to market, bringing along fresh capital of their own.
As the sector began to recover, PMI carriers put themselves front-and-center as a prime source for the type of private capital that the Obama administration was seeking to bring into the housing finance market to offset taxpayers' exposure to Fannie Mae and Freddie Mac, which remain under federal conservatorship.
The government-sponsored enterprises and their regulator have been receptive to those overtures — albeit with new capital requirements and other safeguards in place — and have worked to identify new ways they can work with PMI companies.
Meanwhile, the industry's six remaining PMI carriers are on a mission to restore relationships with lenders and build market share in a consolidating business.
"The No. 1 thing we offer is a promise. We sell an insurance policy and we're promising to do something in the future and we want to do everything we can to make sure that happens," said David Gansberg, president and CEO of Arch Mortgage Insurance Co.
"As an industry we suffered for that. As an industry we had some failings in the past and I think everyone who is still in the business is working hard to try and change that. We have much better coverage forms now, so there is a lot more certainty. But over time we need to improve in that," he said.
To that end, PMI carriers are striving to differentiate themselves. From new technology and pricing methodologies to value-add services and more favorable policy terms, PMI companies are cultivating deeper customer relationships to secure the future of their business.
Modern private mortgage insurance is only 60 years old, dating back to when Max Karl started Mortgage Guaranty Insurance Corp. in 1957. The GSEs used the product as a credit enhancement on low-down-payment loans they purchased.
Mortgage insurance use continued to grow and in 1992, the industry's annual volume of new insurance written topped $100 billion for the first time. But with success came notoriety. PMI policies originally weren't required to include cancellation provisions, and they often didn't. Then in 1997, after finding he couldn't remove coverage on a Virginia condo he owned, then-Republican Rep. James Hansen of Utah introduced federal legislation with then-Sen. Al D'Amato, R-N.Y., requiring PMI cancellation after a homeowner's loan-to-value ratio falls below 80%.
Nowadays, that cancellation feature is one of the biggest differentiators between PMI and its main competition, Federal Housing Administration insurance, which remains in place for the life of the loan. By 2016, the PMI industry's annual volume of new insurance written was approximately $260 million.
While many PMI executives come from a mortgage banking background, Gansberg's career is rooted in the insurance industry, first as an actuary and later as a property and casualty and reinsurance executive. That background offered a unique perspective when Arch Capital Group began exploring entering the PMI sector.
Arch wanted to be in private mortgage insurance but "initially, primary U.S. mortgage insurance wasn't part of the business plan because of the barriers to entry — the need to get GSE approval, which at the time was very difficult — and also the need for a technology platform," Gansberg said. Technology is important for ease of use by lenders in ordering PMI, he said.
So Arch created a reinsurance unit and was working on other areas of mortgage credit risk transfer. But the bankruptcy of The PMI Group, parent company of PMI Mortgage Insurance Co., provided an opportunity to enter the primary business. In 2014, Arch Capital Group formed its PMI business by acquiring assets of PMI Mortgage Insurance Co. and CMG Mortgage Insurance, a joint venture between The PMI Group and CUNA Mutual that only did business with credit unions. Arch also acquired PMI's technology in the deal.
With Gansberg at the helm, Arch MI began creating relationships with bank and nonbank mortgage lenders. "We took advantage of that opportunity because we saw the future and we saw the potential," he said. "The industry itself was coming out of the crisis and business was good — it went from being very bad to very good."
Another opportunity arose when insurance behemoth American International Group faced shareholder pressure to spin out certain operations, including United Guaranty Corp., the PMI sector's largest carrier in terms of both new insurance written and insurance-in-force.
Arch acquired United Guaranty in a deal that closed at the end of 2016, catapulting itself from the second-smallest PMI provider to the sector's largest.
Arch's bold acquisition is strongest indicator that the private mortgage insurance industry has regained its health.
"There is significantly more confidence in that now in the industry, and there are a couple of reasons. One is the new capital requirements the GSEs put in place. It is the first time there's been risk-based capital [requirements] in the industry," said Bose George, an analyst with Keefe, Bruyette & Woods. Then there is the higher quality of the loans being insured. Both have "meaningfully improved the capitalization of the companies," he said.
The PMIs have one big win in 2017, when the Trump administration indefinitely suspended a last-minute FHA premium cut announced by the outgoing Obama administration. That's bolstered the outlook for the PMI sector, particularly as the need for housing remains reasonably strong.
"Unless there is some change in FHA that pulls business that way, these trends in MI are going to be good," George said.