TheMReport — News and strategies for the evolving mortgage marketplace.
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Th e M Rep o RT | 35 feature any commonsense product design is requiring mortgage insurance on loans with loan-to-value (LTV) ratios greater than 80 percent. Mortgage insurance (MI) has traditionally been an effective way to expand homeownership oppor- tunities for first-time homebuyers while providing lenders, large and small, with a competitive, afford- able, and readily accessible way to reduce credit risk with private capital. The benefits of using MI to insure a low-down-payment loan are considerable: • Borrowers are able to qualify for a mortgage loan despite having accumulated only a small down payment • Lenders and borrowers benefit from MI's transparent pricing and credit terms • MI enables lenders to provide borrowers with qualification and cost information at the time of application • Lenders have the option of having the MI company review and underwrite the loan for MI, giving the lender added confidence to approve the loan • Should a borrower experience financial hardship, MI com- panies work with servicers to help avert foreclosure through loan modification and other loss mitigation alternatives Despite the GSEs' dominance of mortgage markets today, there are still opportunities to develop portfolio products, even in the high-LTV space. The market is responding by creating new kinds of loan products that lenders can keep in portfolio rather than sell to the GSEs–and MI is evolv- ing to reduce the risk involved. These include hybrid-ARMs, match-funding arrangements with the regional Federal Home Loan Banks, and jumbo loan programs. The Lending Horizon Expands T o support these non-GSE initiatives, Arch MI an- nounced earlier this year the launch of a new mortgage credit enhancement solution, Arch Mortgage Guaranty Company (AMGC), created specifically to support the needs of portfo- lio lenders. Moody's Investors Service has rated AMGC "A3"– the highest Insurer Financial Strength rating by Moody's in the U.S. mortgage insurance industry. As a result, AMGC's mortgage insurance–currently available through the Portfolio Power SM and Millennial Mort- gage products—gives loan origi- nators the confidence to meet unique borrower needs with loans they keep in portfolio. What kind of "unique borrower needs"? Portfolio loan solutions insured by AMGC allow lenders to create programs with lower down payment requirements, even on jumbo loans. Other opportunities include loans with higher debt- to-income (DTI) ratios, non- Qualified Mortgage loans meeting the ability-to-repay requirements, and loans with lower coverage options compared to GSE loan programs, which could reduce the borrower's monthly payment. AMGC is also able to provide loss protection on prime loans held by real estate investment trusts and those intended for private-label securitization. AMGC is a powerful solution that enables portfolio lenders to offer low-down-payment op- tions to prime borrowers while reducing their own exposure to payment default risk on portfolio loans. Loans with AMGC cover- age often represent lower risk exposure for a lender's portfolio than mortgages originated with- out AMGC protection. W ith 2016 just around the corner, mortgage lenders are carefully assessing the various economic factors that may affect the U.S. housing market in the coming year. Although homeownership is projected to grow, there's concern that stricter regulations, possible interest-rate increases, and the unpredictable impact of volatile international markets could curtail the continued housing recovery. It's likely we will continue to see a moderate interest-rate environment, causing financial institutions in 2016 to seek en- hanced yield opportunities that both expand their share of new originations and avoid the excesses of the pre-2008 market. One key opportunity is portfolio lending. Currently, there isn't a lot of discussion about the role residential mortgages can play in building a financial institution's healthy loan portfolio. While most financial institutions today focus their origination strategies exclusively on loan programs salable to the government sponsored enterprises (GSEs) or FHA, they may be overlooking profitable lending niches targeted to strong, creditworthy bor- rowers that also provide safe and attractive portfolio yields. Retail portfolio lenders can carefully control both interest- rate and default risk by designing sound loan programs that are sensible for their specific markets. A key component of