Borrowers who are not able to put 20 percent down when purchasing a home are viewed by lenders as a higher credit risk. Private mortgage insurance (MI) enables these borrowers to qualify for a conventional loan by insuring the lender against potential losses in the event a borrower is not able to repay the loan and there is not sufficient equity in the home to cover the amount owed.
More than 38 million borrowers helped
Private MI has helped more than 38 million low down payment households purchase a home or refinance an existing mortgage by enhancing their ability to obtain a mortgage in an affordable way. Private MI is backed by private capital, not taxpayers, thus reducing government exposure to mortgage risk.
MI is constantly evolving to meet the needs of the market
There have been many regulatory and industry-led reforms over the last decade to improve and strengthen the role of private MI in the nation’s housing finance system. USMI’s report, “Private Mortgage Insurance: Stronger and More Resilient,” analyzes the various regulatory enhancements and industry-led initiatives that private mortgage insurers have taken and continue to take to ensure sustainable mortgage credit through all market cycles and to better serve low down payment borrowers in the conventional market, especially during times of economic distress.
The enhancements to the industry include:
- Private Mortgage Insurer Eligibility Requirements (PMIERs) – Adopted in 2015 and updated in 2018 and 2020, PMIERs nearly doubled the amount of capital each mortgage insurer is required to hold. USMI members collectively hold $11 billion in excess of these requirements.
- New Master Policy – Developed with substantial input from the Federal Housing Finance Agency (FHFA), these updated terms and conditions from mortgage insurers for lenders provide lenders with greater clarity pertaining to coverage. In the latest update in 2019, USMI members developed a common Master Policy, which became effective on March 1, 2020.
- Rescission Relief Principles – First published in 2013 and updated in 2017 and 2020, these principles allow MIs to offer day-one certainty to lenders of coverage, including automatic relief after 36 timely payments.
- MI Credit Risk Transfer (MI-CRT) Structures – Private MI companies have transferred nearly $73.8 billion in risk on more than $3.4 trillion of insurance- in-force (IIF) through both reinsurance and insurance-linked notes since 2015.
Robust government standards
The Private Mortgage Insurer Eligibility Requirements are a set of operational and financial standards that private mortgage insurers must meet to be approved to insure loans acquired by the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.
PMIERs are an important part of the significant efforts of policymakers and the MI industry to address lessons learned from the 2008 housing downturn. PMIERs created the strong foundation for efforts to further “de-risk” the GSEs through expanded use of private capital with MI.
The GSEs’ regulator, the Federal Housing Finance Agency (FHFA), publishes PMIERs, which were last updated in 2020. These robust requirements provide greater confidence to market participants and policymakers and strengthen the role of the private MI industry in the conventional market.
Among the requirements:
- Financial requirements to ensure that “[a]pproved Insurers have adequate liquidity and claims-paying capacity during periods of economic stress”
- Business requirements to identify, measure, and manage exposure to counterparty risk
- Quality control requirements regarding underwriting and eligibility guidelines, data accuracy, and fraud prevention
Since 2008, private mortgage insurers implemented new master policies with their lender customers that provide assurances about the consistent handling and payment of MI claims. These new master policies bring greater transparency and clarity to contractual protections for lenders and investors.
Additionally, USMI members continue to work closely with the National Association of Insurance Commissioners’ (NAIC) Mortgage Guaranty Insurance Working Group, which provides for capital requirements and regulation at the state level through the Mortgage Guaranty Insurance Model Act and other elements of solvency regulation.
Private MI is available through all market cycles
Private mortgage insurers have a long history of consistently offering mortgage insurance even during significant market downturns. This makes MI very different from capital markets structures that have historically been prevalent during boom cycles but are less available during downturns. Today, private mortgage insurers are even more reliable to lenders and the U.S. government thanks to new master policies that provide enhanced contractual certainty on how and when mortgage insurers pay claims.
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