Mortgage insurance – added problem for U.S. housing

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Mortgage InsuranceIn the present financial crisis, policymakers in the U.S. have started analyzing the structure of the U.S. housing finance system and the role of the federal government in supporting the flow of money to the housing sector. Private Mortgage Insurers rank among the lesser known components of the present housing finance system. The recent downfall of PMI Group’s credit indemnity trade is a hint to the fact that, a huge part of the private sector of U.S. housing require some modifications.

Quite similar to it’s rivals, MGIC and Radian, PMI was once in a phase of mortgage roar. It also had $4 billion capitalization of market. The current U.S. housing downturn represents the worst scenario for PMIs since the time of Great Depression. The current challenges for the industry include competition from the Federal Housing Administration. The current housing downturn will give a valuable and rare benchmark to assess the adequacy of PMIs’ reserves against the requirements of the future housing finance system. Last week, the Arizona Department of Insurance obtained an “Order Directing Full and Exclusive Possession and Control of Insurer” with respect to PMI. Under the order, the AZ Department of Insurance has full control and possession of PMI. The seizure was followed by heavy losses at PMI since the housing market bubble burst.

PMI can be compared to different other forms of credit risk mitigation – risk assumption by GSEs, bond insurers, and government mortgage insurance. From the perspective of economic stability, these forms of credit risk mitigation are not capable of bearing the severe risk associated with high – LTV mortgages.
Among the six main home loan insurers, only one bears an investment-grade rating for credit. Some of them are quite near to violating their risk-to-capital border of 25 to 1 – the least requirement for ensuring that they have sufficient weapons to pay claims. According to CRT Capital, PMI needed simply a single quarter to cross this door sill, progressing from 24.4 to 1 to 58.1 towards the last part of June.

This housing crisis made life tough for the insurers of mortgage. To earn money, they guard lenders against forthcoming losses on mortgages that do not cover 20 percent initial payment from the borrower. Since banks are no longer willing to lend the borrowers, who do not make heavy down payments, their business has been seriously hampered.

If at any point of time, the government thinks of excluding itself from housing finance business, it has to ensure that the backstops of the private sector are well grounded and systematically managed.

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