Looming Mortgage Insurance Shortage in North Carolina

Two large mortgage insurance (“MI”, also “PMI”) companies face a deadline from the state of North Carolina, which if breached would mean that they would no longer be able to write MI in the state.

North Carolina imposes capital requirements on mortgage insurers. In general, they want an MI company to have a very sound financial position.

There are only 8 active mortgage insurance firms in the United States. One, CMG, is primarily focused on working with credit unions. Most tend to work with a cluster of different lenders. It isn’t unusual for an MI company to have more than 10 percent of its business with one lender. This is the case with both PMI Group, which gets a substantial amount of its business from Wells Fargo, or with Republic, where Bank of America is a big customer.

One large MI company exceeded the NC Department of Insurance’s maximum risk-to-capital ratio in January. They were granted a two-year waiver by North Carolina. This means that an intervention is sometime off. Were that day to come, though, the right to participate in other states would come in to question. Moreover, two years isn’t that long away. If that company can’t put its ship in order by then, their loss will be North Carolina’s loss.

The other firm has until July to raise more capital.

Mortgage insurance generally serves as a credit enhancement for conventional mortgage loans written to borrowers that put down less than twenty percent. In today’s marketplace, lenders are extremely conservative and their interest wanes when they are presented with the chance to loan more than 80 percent of the value of a home.

FHA has stepped in to that gap and taken the business that was previously the domain of private mortgage insurance. In 2010, according to the PMI Group 10-K, FHA insured five times more mortgages than PMI companies insure. That is in contrast to 2007, when PMI insured four times more loans than did FHA.

In part, these changes reflect the needs of borrowers in a market that doesn’t seem suitable for many. FHA requires a very low down-payment – often as little as 3.5 percent – whereas loans delivered to the GSEs encounter challenges with less than twenty percent down. The GSEs often take loans with higher LTVs, but often PMI steps in to provide credit enhancement.

FHA has helped a lot of people. However, the Federal Housing Finance Administration (“FHFA”) directed FHA to shore up its business recently. Beginning last month, FHA premiums increased 25 basis points. FHA now costs more than mortgage insurance for most borrowers. Long term, FHFA wants to see FHA’s presence reduced.

All of this underscores why less mortgage insurance could be a problem for housing sales. Many borrowers are shut out of buying a house without a down payment. In 2009, the National Association of Realtors estimated that a family that started with zero assets and then saved $200 a month would need 15 years to put down 20 percent on a median-priced home ($175,000) in the United States.  Mortgage insurance makes homes affordable.