Underwater Mortgage Insurers Help Borrowers Stay Afloat
by Weiss Ratings | August 19, 2011
Mortgage insurers face huge losses as an apparently unanticipated side effect of the mortgage lending debacle. Many are underwater further than some of the borrowers they insure. Without taking action, some of those insurers will fail. So what are they doing to stem losses, and how are they helping borrowers along the way?
The concept of mortgage insurance is to provide prospective homebuyers, who have little or no cash for a down payment, the ability to get a loan. Historically, lenders leery of loaning to folks without skin in the game, look to mortgage insurers to shore up the deal. So insurance makes it possible for more people to buy homes.
A Mortgage Insurance Premium (MIP) is typically placed on Federal Housing Authority (FHA) guaranteed loans to protect the lender if a borrower cannot repay the loan.
And, Private Mortgage Insurance (PMI) is required on conventional home loans with a loan-to-value ratio exceeding 80 percent. That helps borrowers with less than 20 percent to put into the purchase get loans at prevailing interest rates.
There was a time when lenders and investors in mortgage backed securities could count on people paying their home mortgage payments before they paid any other bills. That’s no longer the case. Since the mortgage bubble burst in 2008, borrowers have been defaulting on home loans in record numbers. And mortgage insurers have been under the gun to pay lenders off.
Mortgage insurers seemed to have little recourse. More recently, they’ve begun to find ways to reduce losses ...
According to a recent article in DSNews.com, a publication specializing in default servicing, Freddie Mac, the government sponsored purchaser of many insured delinquent loans, is seeing a “material increase” in mortgage insurer rescissions, cancellations and denials of coverage. Under those circumstances, Freddie Mac expects the lender to buy back the loan.
So now there is incentive for lenders and loan servicers to work with borrowers to find solutions other than foreclosure. Mortgage insurers are beginning to make an impact by taking a more assertive role when loans are in default. And with approximately 6.5 million loans delinquent or in foreclosure according to a recent report by Lender Processing Services, the time for insurers to act is now or never.
How Some Insurers Are Slowing Losses
Rather than leave the “process” to lenders and loan servicers, insurers are raising expectations for working out alternatives to foreclosure with borrowers. To do that, insurers are turning to a growing number of specialty loan servicing companies.
Insurers are hiring loan servicers that specialize in default servicing to review the processes of other servicers. Under this scenario, it may no longer be acceptable for a servicer to make only one call or only a few attempts to assist a troubled borrower before moving to foreclosure and insurance claim. Instead, specialty servicers recommend ways to reduce losses for loan stakeholders.
Where possible, specialty servicers provide borrowers with alternatives to foreclosure including loan modifications, forbearance plans, short sales, short payoffs, and temporary payment suspensions. With stakeholder approval, some are offering to reduce delinquent borrower’s principal to 95 percent of the home’s current market value. The loan modification requires homeowners share 25 percent of the home’s appreciation with the investor when the home is eventually sold. These solutions can sometimes be a win-win for all parties.
And under a recent government mandate, some specialty servicers are auditing the largest servicers to ensure borrowers are getting a fair shake. The expectation is smaller servicers, which will soon be subject to government mandated reviews as well.
While it’s not likely mortgage insurers will recover overnight, it is clear the more focused approach gives them a better chance at reducing claims exposure. And when mortgage insurers find servicers have neglected options to avert insurance claims, delinquent borrowers are often unintended winners.
Read more about mortgage insurers.
About Weiss Ratings
Weiss Ratings is the nation’s leading independent provider of bank, credit union and insurance company financial strength ratings, accepting no payments for its ratings from rated institutions. Weiss Ratings also provides debt ratings on 49 sovereign nations.
By adhering to its independent business model, Weiss outperformed Standard and Poor’s, Moody’s, A.M. Best and Duff & Phelps (now Fitch) in warning of future life and health insurance company failures, according to a 1994 study by the U.S. Government Accountability Office (GAO). Similarly, Weiss was the only one to identify, in advance, nearly all major banks that failed or required a federal bailout in the 2008 debt crisis.