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Private Mortgage Insurers Feel the Mortgage Hit

posted by Adam Levitin

The continuing mortgage crisis is now making itself felt in the private mortgage industry. Fannie Mae and Freddie Mac recently announced they would cease purchasing mortgages insured by Triad Guaranty, the smallest of the seven private mortgage insurers that make up most of the market. That was a death sentence for Triad, which was unable to consummate a sale of its business. Triad has now stopped underwriting new business and is now engaged in a "run-off" (insurance-speak for "wind-down"). See here for more details on Triad's demise and notes on another three PMI companies that could face Triad's fate.

I've been puzzled why PMI insurers weren't more vocal advocates of mortgage modification in bankruptcy. Most, (but not all) have exclusions for bankruptcy modification losses. That means PMI insurers would be required to pay out in foreclosure, but not in bankruptcy. Given that, you'd think they (and their state insurance regulators) would be pushing for legislation permitting modification of all mortgages in bankruptcy. If anyone can explain the political economy of the PMI industry's slumber on bankruptcy modification, it'd be great to have in the comments.


Follow the money, Professor.

Take a look at how closely the pmi insurers are connected to servicers. You can play Six Degrees of Separation with most of them - some you don't get past the 2nd degree. The PMI Group used to own majority stock in Fairbanks Capital - until they sold Fairbanks/Select Portfolio to CSFB in 2005. If I remember the SEC filings correctly, PMI was **still** receiving income from Fairbanks/SPS as late as the 1st quarter of 2008.

The pmi insurers don't want servicers making modifications any faster than absolutely necessary simlpy because the longer a borrower can be held in some form of default the servicer is making money off of the borrower via late fees, etc. depending on the terms of the PSA of the specific RMBS trust that any given loan is in.

Take a closer look at the relationship between pmi insurers that own servicers sometime. We know that pmi can be canceled once 20%+ equity is reached. However, one of the stips to cancellation is that the borrower must have made the first 12 months of payments on time each month. If the borrower made one payment late within that time frame, they could be saddled with pmi payments for, I believe, the next 15 YEARS.

NOW, consider this. A pmi insurer owns a servicer or a portion thereof. One of the largest complaints against the servicing industry is that payments made on time don't get posted in a timely manner. If a servicer holds ONE payment until past due within the first 12 months of a loan it not only generates fee income for the servicer but it effectively locks in a stream of income for the pmi provider for the next 15 years.

All that said, given the sheer volume of foreclosures, why isn't pmi insurance kicking in to cover the losses? Then again, who does pmi insure against loss? Are lenders/note holders making pmi claims to recover the loss on a loan and then foreclosing on the property itself after the loss has been covered by pmi insurance? Double dipping?


Some nice video work at the top here from past contributor attorney Tara Twomey...

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