2008 Mortgage Guaranty Report

             Residential mortgage guaranty insurance provides protection to lenders against default by borrowers who initially have less than 20 percent equity interest in the mortgaged property.  This form of insurance is designed to stimulate home ownership by giving consumers with lower down payments access to credit markets. Generally, lenders require mortgage guaranty insurance for loans exceeding 80 percent of the value of a home.   

              The mortgage guaranty insurance market is sensitive to general macroeconomic conditions associated with loan defaults, such as interest rates and rates of unemployment.  During periods of significant economic contraction in the finance or housing sectors, insurers may be subject to catastrophic losses.  Indeed, the entire industry was decimated in the 1930s, and the private market for mortgage insurance did not recover until the mid-1950s. 

              Due to their exposure to catastrophic risk, mortgage guaranty insurers have been subject to regulatory and capital requirements atypical for most other lines of business.

1. Monoline Requirement:  To ensure that reserves are adequate, mortgage guaranty insurers are prohibited from selling other kinds of insurance. Reserves are dedicated solely to covering default losses and are not subject to depletion by losses in other lines.

2.  Capital Requirements:   All insurers are required to maintain reserve capital to cover claims.  Generally, reserve amounts are established on pending claims and set by actuaries using statistical techniques to project future loss trends.  In addition to such reserves, mortgage guaranty insurers are required by law to maintain a contingency reserve equal to 50 percent of premium.  Due to the long-term nature of the risk assumed (i.e. some portion of the life of a mortgage), the contingency reserve must be held for 10 years unless it is used to cover losses exceeding 35 percent of premium in a given year.  See definitions page for a discussion of the different types of reserves. 

Data Issues

              Reserves are typically recorded as a liability on insurers’ financial annual statements. However, depending on a carrier’s state of domicile, changes in the contingency reserve may or may not be recorded as a loss in a given year.  Thus, standard measures of market performance, such as loss ratios, may be somewhat misleading when derived from the annual statements, in-as-much as these measures combine dissimilar data.  For this reason, the Missouri Department of Insurance, Financial Institutions & Professional Registration (DIFP) collects mortgage guaranty data in a way in which different reserve types are tracked separately so that loss data may be structured in a consistent manner across all companies.  Therefore, data presented in this report may vary somewhat from data obtained from the annual statements.

Current Trends 

              The mortgage guaranty market has grown very significantly since the early 1980s.  Between 1983 and 2008 earned premium in Missouri increased by 1,360 percent, from $7.8 million to $113.6 million.  This growth was in part fueled by declining interest rates, federal programs designed to increase homeownership, an increase in the size and price of homes, greater willingness to finance buyers with lower down payments, and simple population growth.

              In 2008, mortgage guaranty insurers experienced the highest losses in over 30 years.  In Missouri between 1989 and 2000, insurers in no year incurred losses exceeding 30 percent of premium.  In 2007, losses equaled 114.4 percent of premium, increasing to 152.2 percent in 2008.   Missouri had a lower level of losses than was experienced nationally.  For the US as a whole among these same insurers, losses equaled 127.9 percent and 228.7 percent of premium in 2007 and 2008. 

              Losses were partially covered by drawing down contingency reserves (see discussion above).  In Missouri, insurers incurred $173.1 million in losses, and reduced contingency reserves of $29.1 million.  The year 2008 was the first time since 1983 that overall contingency reserves were drawn down to cover losses.

              Losses measured without regard to the contingency reserve is call the “true loss ratio” in this report, and is the standard measure of loss used for other lines of business.  In addition, a “loaded loss ratio” reflects changes in the contingency reserve (see definitions page). 

              This report was compiled using information submitted by the insurance companies.  While every effort is made to ensure accurate data, the accuracy of this report is dependent upon each company’s data.  The charts and graphs in Section I utilize data submitted by all mortgage guaranty insurers writing in Missouri for 1979 through 2008.  Section II is based on companies actively writing in Missouri for calendar year 2008.  Section III ranks mortgage guaranty insurers on their 2008 data by premium earned.

              Any questions regarding this report should be directed to the Statistics Section, Missouri Department of Insurance, Financial Institutions & Professional Registration, P.O. Box 690, Jefferson City, Missouri 65102-0690.  Also, additional copies of this report can be received by sending a written request, with payment of $35 per copy, to this same address.