A Peek Inside Successful Lending Shops

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Feature M ortgage insurance has a lengthy history that includes one complete collapse and the recent near collapse that almost wiped out the private industry for the second time. But now that the crisis has passed—though there are some lingering effects—more growth is expected in the future. The Past T he concept started around the turn of the century as the country grew, but the industry, along with many others in the U.S., collapsed with the onset of the Great Depression in the late 1920s, related Glen Corso, EVP, general counsel for NMI Holdings in Emeryville, California. The federal government became the source for mortgage insurance as part of the start of the Federal Housing Administration and the New Deal in the 1930s. Private mortgage insurance didn't re-emerge until Max Karl founded Milwaukee, Wisconsin-based Mortgage Guarantee Insurance Company (MGIC) in 1957. MGIC says on its website that Karl, a real estate attorney, observed the struggles that people had with saving for a down payment on a home. He also understood the risks that mortgage originators faced in lending the money to potential homebuyers. The 100 percent government guarantees were cumbersome as well. By insuring only the top portion of the mortgage, a private insurer could provide less costly and easier financing for borrowers with less than a 20 percent down payment. Karl and investors, many of whom were savings and loan executives, raised $250,000 to open MGIC. MGIC's success gave rise to competitors, including PMI Mortgage Insurance Co., RMIC, and Triad that found themselves unprepared for the onslaught of defaults that started in 2007–2008. The private mortgage insurance industry received a big boost in the late 1960s and early 1970s, when Fannie Mae, then Freddie Mac, became shareholder-owned companies and started buying mortgages, providing more liquidity and, therefore, supply for the mortgage market. MGIC survived, as did Radian Guaranty, located in Philadelphia; Genworth Mortgage Insurance based in Raleigh, North Carolina; and United Guaranty Corp. headquartered in Greensboro, North Carolina, but even the survivors came out of the crisis far weaker, and some questioned if they would survive at all. Sal Miosi, VP of marketing for MGIC, credits his firm's survival to good finances before the crisis, three subsequent raises of capital, increasing premiums and sharply reducing the mortgages the firm agreed to insure. "We got caught up in the Great Recession and the housing collapse," Miosi said. "We insured a lot of loans and there was a lot of layered risk." MGIC, like other insurers, went along with the Fannie Mae and Freddie Mac guidelines—if the GSE OK'd a mortgage, the insurers would accept the risk. But Fannie and Freddie were approving mortgages with "layered risk." For example, the GSEs were accepting low- or no-doc loans with high LTV and relatively low FICO scores. When home prices kept appreciating, those compound risks didn't matter. But when the market started falling and with the high level of loans with those layered risks, the private mortgage insurance industry—and the government's FHA program—were ill-prepared for the volume of defaults. The risks weren't adequately captured by the underwriters or by the insurance premiums, says Niket Patanaar, SVP and global head of financial service for Sutherland Global Services. "A lot of things weren't supportable; we were insuring a lot of things that we are not insuring today," Miosi agreed. The Present F inancial reports were starting to show a recovering industry in the summer. MGIC and Radian reported earnings in mid-July, with Genworth to report after press deadline. United Guaranty's financial results roll up into those of corporate parent AIG, which was to report its earnings at the beginning of August. MGIC reported its first quarterly profit in three years, boosting the company's price per share 10 percent the day earnings were released. and are at their lowest point in the last five years." MGIC is slowly starting to insure some riskier mortgages, though Miosi doubts the company will ever go back to insuring some of the loans it did during the housing bubble. Radian reported a loss of $33.2 million, or 19 cents a share, versus a year-earlier loss of $119.3 million, or 90 cents a share. The latest period included net investment losses of $130.3 million, among other things, compared with gains of $26.4 million a year earlier. Mortgage insurance written grew 60 percent. On an adjusted basis, the company reported earnings of 5 cents per share. "This improved composition [of "This improved composition [of the housing industry] has helped our mortgage insurance business achieve profitability, absent the impact of fair value gains and losses, for the quarter and six months." —S.A. Ibrahim, Radian The company reported net income of $12.4 million, or 4 cents a share, in the second quarter, compared with a loss of $273.9 million, or $1.36, in second quarter 2012. In the reporting period, mortgage insurance loss provisions were down to $136.4 million from $208.1 million a year earlier but up from $132 million in the first quarter. Mortgage insurance loss reserves were about $2.7 billion as of June 30, down from $3.2 billion a year ago and $2.9 billion in the first quarter. CEO Curt S. Culver said he was "encouraged about the recent credit performance given that as of quarter end, the number of delinquent loans decreased 24 percent year over year the housing industry] has helped our mortgage insurance business achieve profitability, absent the impact of fair value gains and losses, for the quarter and six months," Radian CEO S.A. Ibrahim said in a statement. The Future T he worst is behind the private mortgage insurers, at least for the time being, analysts and those in the business agree, citing the recovery in the housing market. In addition to increasing the health of the housing and mortgage industry, the private mortgage business will be buoyed by the rising premiums The M Report | 21

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