In this Analysis, David Weiss, Matthew Rosso and Whitney
Clymer* explain what mortgage insurance is, its history, and the economic
collapse that caused an unprecedented rise in claims submitted to mortgage
insurers. They explain how the mortgage crisis impacted the finances of the
mortgage insurers spurring them to change their behavior and handling of
claims. They explain how mortgage insurers have escaped scrutiny for the
mortgage crisis despite their role in increasing the origination of riskier
loans. The authors write:
IV. Mortgage Insurers Were Complicit with Expansion of Underwriting
Guidelines and Loan Products
As a starting point, mortgage insurance is designed for riskier mortgage
loans. For conventional loans, mortgage insurance is required only where the
borrower makes less than a 20% down payment. Mortgage loans with lower down
payments carry more risk to lenders and investors as borrowers have less
"skin in the game" and such loans are more susceptible to risk from
housing market fluctuations. According to MICA: "Studies show that
homeowners with less than 20 percent invested in a home are more likely to
default, making low down payment mortgages more risky for lenders and
investors. That's why lenders and investors generally require mortgage
insurance" for such loans.
For many years, the mortgage insurance industry has touted itself as a
critical force in expanding homeownership by making it easier to purchase a
home. For instance, MICA has proclaimed, "Private MI makes it possible for
you to buy a house with a low down payment and get into a home years sooner
than you would otherwise." In testimony on June 20, 2000 before the
Housing and Transportation Subcommittee of the Senate Committee on Banking,
Housing and Urban Affairs, W. Roger Haughton a past President of MICA explained
that the "business of mortgage insurance is the business of making
homeownership more affordable. By enabling people to buy homes with as little
as three percent down, mortgage insurance expands the number of eligible homeowners."
That three-percent down requirement quickly became zero as indicated by
Republic Mortgage Insurance Company's announcement on July 6, 2000 that it had
introduced a "new mortgage insurance program insuring loans up to 100% of
a home's value." RMIC explained that the program was "designed to
help more borrowers purchase homes sooner by eliminating the cash required for
a down payment." That announcement came about two months after RMIC
announced its new program called "No Income Verification (NIV)" which
was designed for "lenders seeking ways to make more loans with less
documentation." These loan products allowed borrowers to obtain mortgage
loans without having to document their incomes and/or their assets. Other
mortgage insurers also agreed to insure such reduced documentation loans as
well as mortgage loans with high loan-to-value ratios. Mortgage insurers even
agreed to insure loans that were more than 100% of the property's value.
The mortgage insurance industry knew full well the increased risks they
were taking on in insuring these non-traditional mortgages. For example,
mortgage insurers recognized that stated income loans carried more risk,
including the risk that borrowers would overstate their incomes. In a 2004
article, MGIC's President and CEO stated:
"As you can imagine, these
loans are riskier and borrowers are charged a premium for them, which begs the
question: Why wouldn't a borrower choose to fully document his or her income to
ensure he or she is getting the lowest interest rate possible? It may be
stating the obvious, but you can't document what you don't have; and in many
instances, SI [stated income] and NI [no-income] loan programs are allowing
borrowers to do just that."
Similarly, United Guaranty, when faced with the increased risk of stated
income loans took the following approach: "We're OK with that. We take on
risk by not getting income verification, but it's a good calculated risk."
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* David Weiss is a partner in San Francisco, Matthew Rosso is an associate in Philadelphia and Whitney Clymer is an associate in New York with Reed Smith LLP. All three are members of the firm's Insurance Recovery Practice Group and represent policyholders in disputes with their insurance companies.
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