© 2012 Cengage Learning

Residential Mortgage Lending: Principles and Practices, 6e Chapter 7 Private Mortgage Insurance

© 2012 Cengage Learning Objectives After completing this chapter, you should be able to: – Identify factors contributing to the failure of mortgage guarantee companies in the 1930s. – Discuss how PMI companies reappeared and why. – Understand why private mortgage insurance is so important for residential mortgage lending. – Be able to compare PMI to Mortgage Insurance Premium (MIP) for FHA mortgages. – Explain how mortgage insurance coverage is established. – Discuss how claims are handled by MI companies. – Review the increased risks for MI in today’s market.

© 2012 Cengage Learning WHY IS PRIVATE MORTGAGE INSURANCE SO IMPORTANT IN TODAY’S MARKET?

© 2012 Cengage Learning The Beginning 1950s–1970s: The Rebirth of PMI The 1980s: Difficult Years The 1990s: Golden Years? 2000 and Beyond: The Best of Times, the Worst of Times … Private Mortgage Insurance History and Evolution

© 2012 Cengage Learning

PMI at Work Mortgage insurance provides a financial guarantee to a mortgage lender in return for a fee (a premium), usually paid by the borrower.

© 2012 Cengage Learning

Types of Reserves 1. Unearned premium reserve: Premiums received but unearned for the term of a policy are placed in this reserve. 2. Loss reserve: This reserve is established for losses or potential losses on a case-by-case basis as the company learns of defaults and foreclosures. 3. Contingency reserve: This is a special reserve required by law to protect mortgage lenders against the type of catastrophic loss that can occur in severe economic periods. Half of each premium dollar received goes into this reserve and cannot be used by a mortgage insurance company for 10 years, unless losses in a calendar year exceed 35 percent of earned premiums and the insurance commissioner of the state in which the insurer is domiciled concurs in the withdrawal.

© 2012 Cengage Learning What Do You Think? How is private mortgage insurance (PMI) different from government insurance and guaranty programs? Explain the recent growth of PMI compared to government-sponsored programs.

© 2012 Cengage Learning What Do You Think? What is “pool” insurance and how is it used? How have PMI companies performed in 1980’s and 1990’s? In the 2000’s? Why the difference?

© 2012 Cengage Learning What Do You Think? Discuss how PMI impacts the housing market and the secondary mortgage market. What different methods of PMI premium payment exist and how do you calculate them? What are the benefits and drawbacks of PMI vs. government insurance vs. self- insurance programs?

© 2012 Cengage Learning Check Your Understanding 1.The first private mortgage insurance company was formed in From 1997 to 2005, the annual rate of appreciation nationally increased steadily from four percent to 11 percent, making it more difficult for many consumers to save a large enough down payment. 3.During the 1980s mortgage insurance companies suffered because of origination and servicing “irregularities”. 4.Government-sponsored enterprise (GSE) requirement that loans greater than 80 percent LTV must have MI 5.States require that mortgage insurance companies have $1 of capital for every $25 of risk they insure.

© 2012 Cengage Learning Check Your Understanding 6.Pool insurance reduces both investor and MI company exposure to a certain percentage of the original pool loan amount negotiated, typically five to 25 percent. 7.In some situations a mortgage lender may grant a “piggyback” loan that has a combined LTV of 80 percent or less and requires no mortgage insurance. 8.If a claim is submitted to a mortgage insurance company the MI could pay off the claim and take title to the real estate. 9.Mortgage insurance is good for the lender because it will last the life of the loan. 10.If the LTV of a loan is 90 percent, the secondary mortgage market requires mortgage insurance coverage to 30 percent.