Resurrection of MI Could Lead to Easier Creditby Tim Manni
It hasn’t been easy for any class of borrowers to get approved for a home loan recently. Since the housing market collapsed at the end of 2006/beginning of 2007, lenders have incorporated strict underwriting standards in order to weed out less-qualified consumers. By today’s lending standards, borrowers must have stellar credit, job security and be willing and able to put down a lot of money upfront.
Years ago, when credit conditions were more relaxed, borrowers who couldn’t afford to make a 20% downpayment were simply required by the lender to purchase mortgage insurance (MI). MI is an insurance policy designed to protect the lender in case the borrower defaults.
An Industry on the Rocks
Yet, for the better part of the decade, MI has been an industry on its way out. Between the years 2003 and 2006, the increasing presence of piggyback loans — a loan structure that allows borrowers to finance a down payment by taking out a second mortgage — severely diminished MI’s presence and influence in the marketplace. Secondly, the housing crisis resulted in the failure of countless loans backed by MI. The combination of decreased market share and failed loans have crippled the industry.
However, according to the latest issue of National Mortgage News (NMN), a renewed interest in the MI Business may be forming. Billionaire investor Wilbur Ross has been said to be the leading bidder in line to purchase all or part of United Guaranty Inc. — one of the nation’s seven MI firms (one is currently self-liquidating).
A Desirable Industry?
Paul Muolo of NMN writes, “There’s two ways to look at Wilbur Ross’ attempted foray into the mortgage insurance business: he’s a bottom-fisher feeding on the carcass of a troubled industry or his entry is reason for hope because it shows that private capital still believes in the business.”
If the latter half of Muolo’s explanation is the real reason behind Ross’ “foray into the mortgage insurance business,” it could spell encouraging news on several fronts. If Mr. Ross does in fact decide to invest, it could very well prompt other private investors to rejoin the market, creating a renewed sense of competition (very much like what’s beginning to happen in the jumbo mortgage market).
With no competition outside of FHA-backed lending, MI companies are starting to regain their presence in the market and increase their issuance of policies. Ultimately, with lower losses and a more-solid book of business, consumers should begin to see credit conditions ease, making more low-downpayment mortgage money available.
Ross’ other recent transactions may further serve to bolster the hope that private investors may be returning to sectors of the residential mortgage market.
Mr. Ross has already made a big splash in residential servicing by purchasing two large nonprime portfolios as well as a Florida bank that was a large player in payment-option-ARMs.
Ross’ interest in the mortgage insurance industry won’t single handedly revive it, but we’re hoping it will catch the interest of other private investors and prompt them to act as well. The infusion of private capital into the mortgage industry is essential to, among other things, complete the Fed’s smooth transition out of the marketplace.