Backing the backstop
There’s a growing chorus among U.S. legislators to get the government out of the housing business. That’s understandable given the possible $311 billion bill that Fannie Mae and Freddie Mac may rack up for taxpayers, according to a Federal Housing Finance Agency estimate on Thursday. But the recent failure of PMI Group’s mortgage insurance business is a reminder that chunks of housing’s private sector need fixing, too.
PMI, like its rivals Radian and MGIC, was once a highflier in the mortgage boom. It even sported a $4 billion market capitalization. Last week, PMI was effectively seized by the Arizona Department of Insurance. The state regulator took over its mortgage-writing unit after prohibiting it from issuing new policies. That’s a death knell in an industry that needs new premiums to counterbalance claims delivered by the housing bust.
And PMI is hardly alone. Only one of the six major home loan insurers has an investment-grade credit rating. A few are dangerously close to breaching their risk-to-capital limit of 25 to 1 – the minimum required to ensure they have enough firepower to pay claims. It took just one quarter for PMI to race through this threshold, moving from 24.4 to 1 to 58.1 to 1 by the end of June, according to CRT Capital.
The duration of the housing crisis has made life hard for mortgage insurers. They make their money by insuring lenders against future losses on mortgages that don’t come with a 20 percent down payment from the borrower. As home sales have slumped and banks become loath to lend to borrowers who don’t deliver chunky down payments, the business has suffered.
But bad practices prevalent in the good years bear a good part of the blame. For instance, as lenders loosened their credit standards during the boom, many mortgage insurers felt compelled to give banks a share of their premium income. That left the insurers with a smaller cushion to weather losses from claims during the housing collapse.
If the government ever hopes to extricate itself from the business of housing finance, it needs to ensure private sector backstops are well fortified and well regulated.