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ATTORNEY BLOG: U.S. financial crisis – the lost story?

By: Lyle Washowich, Esq.

Arguably the “lost” story during the U.S. financial crisis is (and has been) the profound impact of this crisis on the private mortgage insurance industry. Unlike the spotlight placed on the “too big to fail” banks and other major financial institutions – many of whom received U.S. taxpayer financed “TARP” funds – the private mortgage insurance industry has been turned upside down with little fanfare and virtually no public financial support. Nevertheless, the impact of the financial crisis on the private mortgage industry could well be more profound than the impact felt by the major financial institutions.

Indeed, according to the Mortgage Bankers Association, the “survival to date by all but one of the private MI’s is something to be duly recognized.” See “Private MI: The Last Man Standing,” Robert Stowe England, Mortgage Banking, January 2011. Acknowledging that the remaining six private MI’s have lost substantial monetary sums during the crisis, David Katkov, Executive VP and Chief Business Officer of The PMI Group, Inc., noted that “the industry as a whole experienced some of the toughest issues facing the housing finance system, because we’re structured to be in that first-loss position on low-down-payment loans.” Id. Indeed, given the losses to date and the remaining challenges, the survival of the remaining private MI’s is no guarantee.

In short, the private MI’s serve a market that (under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992) requires loans purchased by Fannie Mae and Freddie Mac to carry mortgage insurance to cover potential losses for loan balances above 80 percent of loan-to-value (LTV). While Standard & Poor’s remains worried about some of the MI’s that exist below investment grade today, both S&P and Moody’s cite as a positive sign that a new company is entering the market — Essent Guaranty Inc., from Radnor, Pennsylvania. To stay alive, S&P has calculated that more than $3.34 billion was raised in 2010 by the MI’s. As cash-burn issues are now prevalent, historically going back to 1990, roughly 20% of all mortgages in the country were higher than 80% LTV – which represents “the insurable marketplace,” according to Mike Zimmerman, Director of Investor Relations at MGIC. Within this slice, the private MI’s have typically insured about 2/3 of the business while the federal government has insured the rest. Id.

Any perceived, and certainly real, recovery by the MI’s will signal the dawn of yet another new day in the residential mortgage finance industry. Stay tuned this year and next year to see how these players rebound. Their trajectory will be a sign of the direction of the industry as a whole.

If you have a question for Lyle or would like to make a comment on the issues discussed in this Blog, please email [email protected].