Private mortgage insurance (PMI) is fulfilling its role in protecting lenders, but many loans hurting lenders today involved techniques that circumvented PMI requirements for home loans, insurers said.

Rick Gillespie, senior vice president, corporate communications, of mortgage insurer Radian, said, “The mortgage insurance industry is doing exactly what it was intended to do. Not without paying.

“Obviously, the companies that comprise the mortgage insurance industry are experiencing the same housing and credit challenges as everyone. But the claims have been paid. Each company is dealing with it a little bit differently from a capitalization and liquidity standpoint.”

Mr. Gillespie noted that the government sponsored enterprise (GSE) charters mandated that mortgage insurance be used on loans where the down payment is less than 20 percent.

Currently, mortgage insurance is used on about 20 percent of all loans originated, he said, and it pays costs associated with defaulted loans, including interest charges during the delinquency period, home maintenance and legal fees.

Jeffrey Lubar, spokesman for the association Mortgage Insurance Companies of America (MICA), explained that mortgage insurance covers a portion of a loan amount–typically 20-to-40 percent depending on what an underwriter requires.

Both Mr. Gillespie and Mr. Lubar noted that many of the loans coming back to haunt lenders today were designed to avoid PMI in cases where the borrower could not afford a 20 percent down payment.

These include “piggyback” loans, or 80-10-10 loans, where borrowers pay 10 percent down and get a loan for 80 percent of the total price of the home. They then get a second loan for the remaining 10 percent.

“They were primarily intended as a workaround to mortgage insurance, and it didn't work out all that well,” Mr. Gillespie said, noting that such loans are not really being written anymore.

“The short answer is that most of the loans that had trouble were not insured loans,” Mr. Lubar said. “They were part of those 'piggyback' structures that people used to circumvent mortgage insurance.”

Mr. Gillespie added, “Obviously the mortgage insurance companies have paid increased claims over the past couple of years, but those are claims that haven't hit the rest of the industry.”

For the insured loans, Mr. Lubar said, “claims continue to be paid as they come due when there are foreclosures.”

Mr. Gillespie said mortgage insurers have paid out about $15 billion in claims over the last couple of years.

The current environment has led to some tighter times for mortgage insurers and a hardening of the market. Mr. Gillespie said that, today, 95 percent of new loans written by Radian are prime, with a small amount then considered subprime. That was not the case at Radian, or elsewhere in the industry, two years ago, he said.

He added that Radian has adequate claims paying capacity and has also recently announced a capital plan where the company has contributed its financial guaranty business to its mortgage insurance business.

The company has been able to transfer nearly $1 billion in statutory surplus and a total of $3 billion in claims paying resources. “When all is said and done, the pro forma risk to capital ratio for Radian Guaranty, the mortgage insurance company, is 10.3 to 1–which is very attractive.” said Mr. Gillespie.

The company, he said, is looking at alternatives to make sure it not only can pay claims but continue to write new business as well.

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