The following is an excerpt from Chapter 5 of Volume I of The Mortgage Professional's Handbook:
MI PROVIDERS SINCE THE GREAT RECESSION
Patrick Sinks, CEO
Historically, the MI industry has been a small industry in terms of active competitors. There are many reasons why the number of MI companies has remained small even as individual companies have merged or gone out of business and new companies have entered. Beyond the substitutability of the FHA and other “Government MI” programs faced originally by Max Karl, a specialist focus requires significant investment to create the infrastructure needed (that is why these capabilities tend to be recycled in the market even if a company stops writing new business). MI insurance exposures are also “long tail” liabilities for which the insurer remains responsible for extended periods of time (and which cannot be re-priced periodically like homeowners insurance or cancelled easily). The monoline regulatory structure limits use of the MI company infrastructure to residential mortgage credit, imposes stringent catastrophic “contingency reserves,” and capital standards have increased over time. And substantial product competition is ever-present in the form of lender self-insurance, “piggy-back” loans structured to avoid MI, and capital-market structures that absorb first loss at a pool level. The combination makes for a consistently challenging competitive environment for the MI industry. MI companies must have a long-term perspective, operate under a conservative regulatory regime, and still be cost-effective and innovative enough to succeed against alternatives to MI.
As of late 2015, the MI industry has seven active competitors. The competitors represent the continuity and change that has characterized the MI industry. MGIC, AIG United Guaranty, Genworth, and Radian each can trace its involvement in the MI industry over a long period of time (MGIC founded the industry, and AIG United Guaranty’s and Genworth’s predecessors were founded in the early 1960s, while Radian’s predecessors were formed in the 1970s). Essent, Arch MI, and National MI emerged during or after the Great Recession in response to the opportunities made available for new MI capacity. In keeping with the recycling theme noted above, Essent Guaranty purchased the operating infrastructure of Triad, which had ceased writing new business in 2009, and Arch entered the MI industry in 2015 by purchasing parts of PMI, which ceased writing new business in 2011. National Mortgage Insurance was a de novo company formed in 2012.
Despite raising over $9 billion in new capital between 2007 and 2013, the MI industry’s experience during the Great Recession was difficult. Loss ratios spiked, individual MI companies incurred substantial losses. At the same time, deteriorating market conditions forced credit-guideline and premium-rating changes that, combined with GSE guarantee-fee increases (also a response to the Great Recession) and introduction of adverse market delivery charges and risk-based, loan-level price adjustments, resulted in a substantially smaller conventional high-LTV (and consequent MI industry) market share, because the FHA maintained credit guidelines and premium rates at pre-crisis levels (the FHA did increase price in 2010 as their capital position rapidly deteriorated, and then in 2015 lowered the premium).
The importance of market confidence was discussed earlier. Unfortunately, the MI industry’s experience during the downturn has generated a number of false claims. The most serious charge is that the MI model “failed” because claims went unpaid and MI companies actively withdrew from the market.
The reality is that claims were paid even by companies that stopped writing new business. An insurance company pays claims even if the company stops writing new business. Collectively the MI industry has paid 96% of all valid claims in cash from 2007 to 2015, and as of 2015 has exceeded $44 billion paid to the GSEs. This effort out-performed the GSE pre-crisis counterparty risk requirement that was based on rating agency criteria (for example Standard & Poor’s minimum rating requirement was AA-), which assumed that just 87.5% of claims would be paid by an approved MI company during a period of extreme stress like the Great Recession. Based on this measure the MI industry’s claims payment record should not be characterized as “failed.”
Nor did the MI industry withdraw from the market. GSE fees and lender costs associated with originating a conventional high LTV loan must be compared against alternative executions such as FHA and other Government MI programs. If the “best execution” chosen is not a conventional loan with MI, that does not mean there was not any MI alternative.
The FHA has more countercyclical flexibility because it only will become insolvent if the U.S. Government becomes insolvent as well, so the FHA has the ability to remain in markets offering capacity on a policy, rather than a commercial, basis. As of late 2015 the FHA has not met its minimum capital ratio since 2009 but still had the ability to reduce premium rates substantially in 2015. No public MI company could have responded in a similar manner.
Two other developments should be noted regarding the use of MI in the future conventional high-LTV market. The new MI master policy, mentioned above, addressed concerns regarding an insurer’s “willingness to pay” by specifying more clearly what is covered, and by creating processes to build policyholder confidence in how the policy is administered. An insurer’s “ability to pay” is generally discussed in terms of financial resources available to pay valid claims. Despite the MI industry performing credibly through the Great Recession, policyholders and the GSEs understandably have sought additional assurances. Policyholders are relying on the process established by state insurance regulators to update the Mortgage Guaranty Insurance Model Act and related insurance laws and regulations governing how MI companies operate and how many financial resources they need to meet claim obligations. The Model Act updating, which is the first comprehensive review of MI law and regulation for a generation, is intended to provide a solid financial and operational foundation for the MI industry (and each individual MI Company) even if housing-finance reform transformed the GSEs into very different entities than they are now. Left unchanged is the specialist focus and use of a monoline approach to business organization, but new possibilities have been created for the use of non-monoline reinsurance and other forms of capital to supplement monoline equity capital.
The other important development regarding MI “ability to pay” in the conventional high-LTV market was the promulgation and adoption of an updated version of the GSE eligibility requirements known as PMIERs. The same provisions that required the GSEs to obtain credit enhancement for high LTV loans also gave the GSEs authority to create and enforce PMIERs for the MI industry. The updated PMIERs include broad-ranging substantive financial and operational provisions which, together with similar updating applicable to GSE seller/servicers, seems intended to avoid the unintended accumulation of credit and operational risk and the attendant confusion that occurs during a crisis. The specifics of the respective eligibility requirements are important but would make this chapter much long if fully explored. The entire MI industry is expected to meet the updated PMIERs standard. The financial provisions of the PMIERs were established as an alternative (or complement) to the GSEs relying upon the rating agencies ratings, and some industry observers have suggested that they may evolve from a “solvency” standard (i.e., are there sufficient financial resources to pay claim obligations?) to a “going concern” standard (i.e., what is needed so that the company can pay all obligations and remain in business?). The operational provisions of the PMIERs are likely to reinforce the intended clarity sought by policyholders from the new master policy and should reduce operational risk, making MI an even more attractive source of credit risk protection and enhancement for the U.S. housing finance system.
Read the rest of this chapter in The Mortgage Professional's Handbook!
During his tenure with MGIC Investment Corporation Chief Executive Officer Patrick Sinks has helped guide the company through several significant evolutions. From a re-birth of private mortgage insurance in the mid-1980s to navigating MGIC through the most challenging housing market the company has ever experienced, Mr. Sinks understands the impact that the mortgage finance industry’s dynamic playing field can have on MGIC.
Mr. Sinks began his career at MGIC in 1978 as a member of the accounting team. He earned several promotions culminating with the role of Senior Vice President – Controller and Chief Accounting Officer before being handpicked by the company’s Chief Executive Officer, Curt Culver, to eventually succeed him as MGIC’s leader. Mr. Sinks was then moved to the sales side of the business as Senior Vice President – Field Operations and was subsequently promoted to President and Chief Operating Officer.
In March of 2015, Mr. Sinks took the helm from the retiring Curt Culver at a time when MGIC is well positioned to capitalize on a changing mortgage market. Over the last several years, Mr. Sinks played a significant role in helping the company augment its capital position in order to improve liquidity and strengthen its claims-paying ability. This includes raising more than $3 billion in capital through stock and debt issuances since 2008. He serves a principal role on the regulatory front as new legislation continues to be finalized on a state and federal level. He has also overseen fundamental changes within the mortgage insurance industry that impact how business gets done. As a result of the strategic, forward planning, MGIC is now in an excellent position to fully participate in the growing housing recovery.
Mr. Sinks earned his MBA from the University of Wisconsin – Milwaukee, holds a Bachelor of Science degree in accounting from Mary College, and completed the Advanced Management Program at Duke University’s FUQUA School of Business.