There will remain a need for private mortgage insurance as credit enhancement on low-downpayment loans even if the government-sponsored enterprises are eliminated, said a former Comptroller of the Currency, Eugene Ludwig.
Ludwig’s consulting firm, Promontory Financial, was commissioned by Genworth Financial to conduct a study of the private MI business. He said during a press conference the company would only do the report if it was a “no holes barred...straight up study of the facts.”
Risk mitigation, said Ludwig, could conceivably come from a government entity, but in a market-driven operation you need some form of insurance.
The question before Congress, he said, is “has the insurance mechanism that we’re using performed well or performed badly? Does it fulfill the function of both mitigating risk on the one hand and allow for efficient operation of the market on the other?”
Ludwig said the study itself does not come to conclusions in that manner, but looking back at the period of time we are in and the role of private MI, it is an effective mechanism for sharing risk that allows for a robust market place as well as enhancing access to it for those who might not have access.
He said his own personal view is that private MI should continue its role even if Fannie Mae and Freddie Mac are eliminated. “Why on earth wouldn’t you have a private sector mechanism like this that is capable of doing its own underwriting, creating its own underwriting standards which have been shown to work and take advantage of that mechanism in the housing sector?
“Will it? We’ll see, but it should,” he said.
Barak Sanford, managing director of Promontory, added that for private MI to continue to exist, there must some sort of requirement for a broad base of borrowers to obtain the product.
A request for comment from Genworth was not returned by press time.
Teresa Bryce, the president of Radian Guaranty, said that she had not read the entire report, but as for the future of private mortgage insurance in a post-GSE environment, she said it is more about the recognition that private capital should be in front of any government participation.
It makes sense for the private MIs to continue in that role, and echoing Ludwig, she said there needs to be a requirement for additional credit enhancement for some loans.
Private MI was the one part of the housing finance system which had performed as intended during the crisis and did “exceptionally well” in two respects, Ludwig said. The industry is not in need of government assistance nor was there a bunch of failures (although there is one company, Triad, which is in run-off and has a deficit of assets to pay claims). Second, it provided support to the system in a time of stress.
Bryce added that the structure of the industry—to hold capital raised in good times to fund the bad times—worked quite well and got the business through the difficult years. More recently, the industry’s ability to raise new capital has allowed it to write new business.
Sanford added the analytic heart of the paper is the section that compares private MI to other forms of risk mitigation. “There are some remarkable differences between the way PMI functions and the way some of the alternatives function.”
Those alternatives include piggyback loans, lender avoidance of high loan-to-value ratio mortgages, lender self-insurance, GSE insurance, bond insurance, credit derivatives and government insurance programs.
The features of private MI are inherent in its nature which makes it more resilient than those alternatives, Sanford said.
Ludwig said there is “no magic” regarding loans having an 80% LTV. While there are no specifics on lowering that threshold, it is possible and should be based on price volatility,
Bryce said it could be prudent to lower the threshold to 70%, noting there were instances of losses of loans in the 80% LTV range.
