Tag Archives: claims

Mortgage Insurers and The Next Housing Crisis

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photo by Jeff Turner

The Inspector General of the Federal Housing Finance Agency has released a white paper on Enterprise Counterparties: Mortgage Insurers. The Executive Summary reads,

Fannie Mae and Freddie Mac (the Enterprises) operate under congressional charters to provide liquidity, stability, and affordability to the mortgage market. Those charters, which have been amended from time to time, authorize the Enterprises to purchase residential mortgages and codify an affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families. Pursuant to their charters, the Enterprises may purchase single-family residential mortgages with loan-to-value (LTV) ratios above 80%, provided that these mortgages are supported by one of several credit enhancements identified in their charters. A credit enhancement is a method or tool to reduce the risk of extending credit to a borrower; mortgage insurance is one such method. Since 1957, private mortgage insurers have assumed an ever-increasing role in providing credit enhancements and they now insure “the vast majority of loans over 80% LTV purchased by the” Enterprises. In congressional testimony in 2015, Director Watt emphasized that mortgage insurance is critical to the Enterprises’ efforts to provide increased housing access for lower-wealth borrowers through 97% LTV loans.

During the financial crisis, some mortgage insurers faced severe financial difficulties due to the precipitous drop in housing prices and increased defaults that required the insurers to pay more claims. State regulators placed three mortgage insurers into “run-off,” prohibiting them from writing new insurance, but allowing them to continue collecting renewal premiums and processing claims on existing business. Some mortgage insurers rescinded coverage on more loans, canceling the policies and returning the premiums.  Currently, the mortgage insurance industry consists of six private mortgage insurers.

In our 2017 Audit and Evaluation Plan, we identified the four areas that we believe pose the most significant risks to FHFA and the entities it supervises. One of those four areas is counterparty risk – the risk created by persons or entities that provide services to Fannie Mae or Freddie Mac. According to FHFA, mortgage insurers represent the largest counterparty exposure for the Enterprises. The Enterprises acknowledge that, although the financial condition of their mortgage insurer counterparties approved to write new business has improved in recent years, the risk remains that some of them may fail to fully meet their obligations. While recent financial and operational requirements may enhance the resiliency of mortgage insurers, other industry features and emerging trends point to continuing risk.

We undertook this white paper to understand and explain the current and emerging risks associated with private mortgage insurers that insure loan payments on single-family mortgages with LTVs greater than 80% purchased by the Enterprises. (2)

It is a truism that the next crisis won’t look like the last one. It is worth heeding the Inspector General’s warning about the

risks from private mortgage insurance as a credit enhancement, including increasing volume, high concentrations, an inability by the Enterprises to manage concentration risk, mortgage insurers with credit ratings below the Enterprises’ historic requirements and investment grade, the challenges inherent in a monoline business and the cyclic housing market, and remaining unpaid mortgage insurer deferred obligations. (13)

One could easily imagine a taxpayer bailout of Fannie and Freddie driven by the insolvency of the some or all of the six private mortgage insurers that do business with them. Let’s hope that the FHFA addresses that risk now, while the mortgage market is still healthy.

Increasing Price Competition for Title Insurers

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The New York State Department of Financial Services issued proposed rules for title insurance last month and requested comments. I submitted the following:

I write and teach about real estate and am the Academic Director of the Center for Urban Business Entrepreneurship.  I write in my individual capacity to comment on the rules recently proposed by the New York State Department of Financial Services (the Department) relating to title insurance.

Title insurance is unique among insurance products because it provides coverage for unknown past acts.  Other insurance products provide coverage for future events.  Title insurance also requires just a single premium payment whereas other insurance products generally have premiums that are paid at regular intervals to keep the insurance in effect.

Premiums for title insurance in New York State are jointly filed with the Department by the Title Insurance Rate Service Association (TIRSA) on behalf of the dominant title insurers.  This joint filing ensures that title insurers do not compete on price. In states where such a procedure is not followed, title insurance rates are generally much lower.

Instead of competing on price, insurers compete on service.  “Service” has been interpreted widely to include all sorts of gifts — fancy meals, hard-to-get tickets, even vacations. The real customers of title companies are the industry’s repeat players — often real estate lawyers and lenders who recommend the title company — and they get these goodies.  The people paying for title insurance — owners and borrowers — ultimately pay for these “marketing” costs without getting the benefit of them.  These expenses are a component of the filings that TIRSA submits to the Department to justify the premiums charged by TIRSA’s members.  As a result of this rate-setting method, New York State policyholders pay among the highest premiums in the country.

The Department has proposed two new regulations for the title insurance industry.  The first proposed regulation (various amendments to Title 11 of the Official Compilation of Codes, Rules, and Regulations of the State of New York) is intended to get rid of these marketing costs (or kickbacks, if you prefer). This proposed regulation makes explicit that those costs cannot be passed on to the party ultimately paying for the title insurance.  The second proposed regulation (a new Part 228 of Title 11 of the Official Compilation of Codes, Rules, and Regulations of the State of New York (Insurance Regulation 208)) is intended to ensure that title insurance affiliates function independently from each other.

While these proposed regulations are a step in the right direction, they amount to half measures because the dominant title insurance companies are not competing on price and therefore will continue to seek to compete by other means, as described above or in ever increasingly creative ways.  Proposed Part 228, for instance, will do very little to keep title insurance premiums low as it does not matter whether affiliated companies act independently, so long as all the insurers are allowed to file their joint rate schedule.  No insurer will vary from that schedule whether or not they operate independently from their affiliates.

Instead of adopting these half-measures and calling it a day, the Department should undertake a more thorough review of title insurance regulation with the goal of increasing price competition.  Other jurisdictions have been able to balance price competition with competing public policy concerns.  New York State can do so as well.

Title insurance premiums are way higher than the amounts that title insurers pay out to satisfy claims.  In recent years, total premiums have been in the range of ten billion dollars a year while payouts have been measured in the single percentage points of those total premiums.  If the Department were able to find the balance between safety and soundness concerns and price competition, consumers of title insurance could see savings measured in the hundreds of millions of dollars a year.

The Department should explore the following alternative approach:

  • Prohibiting insurers from filing a joint rate schedule;
  • Requiring each insurer to file its own rate schedule;
  • Requiring that each insurer’s rate schedule be posted online;
  • Allowing insurers to discount from their filed rate schedule so that they could better compete on price;
  • Promulgating conservative safety and soundness standards to protect against insurers discounting themselves into bankruptcy to the detriment of their policyholders; and
  • Prohibiting insurers from providing any benefits or gifts to real estate lawyers or other parties who can steer policyholders toward particular insurers.

If these proposals were adopted, policyholders would see massive reductions in their premiums.

Some have argued that New York State’s title insurance regulatory regime promotes the safety and soundness of the title insurers to the benefit of title insurance policyholders.  That may be true, but the cost in unnecessarily high premiums is not worth the trade-off.

Increased competition is not always in the public interest but it certainly is in the case of New York State’s highly concentrated title insurance industry.  The Department should seek to create a regulatory regime that best balances increased price competition with adequate safety and soundness regulation.  New Yorkers will greatly benefit from such reform.