Private mortgage insurance companies are continuing to do quite well in the home loan marketplace despite declines in origination volume since the end of the refinance boom.
While originations in 1994 were down 25% from the level a year earlier, new mortgage insurance written by private companies did not decline as significantly, with only a 3.9% drop in business last year, to $131 billion.
Rather than suffering from the decline in originations last year, mortgage insurers benefited from increasingly high loan-to-value ratios, which mean more insurance, and from the push for banks and thrifts to originate low-income to moderate-income loans.
Mortgage insurers provide partial insurance for loans with down payments of less than 20%.
Bruce Harting, an analyst at Salomon Brothers, said the private mortgage insurance industry had grown 20% to 25% over the last few years, and offered an explanation for why new insurance written last year did not mirror the decline in originations.
"Originations dropped dramatically, but the percent of people putting down less than 20% increased dramatically," he said, thus requiring more insurance.
In 1993, about 30% of all borrowers had high loan-to-value ratios. Last year, these borrowers accounted for 36% of the home loan business, he said.
He said those in the business were surprised by the large amount of mortgage insurance written in 1994 - even though a sharp drop was not expected.
Because a large number of originations in 1994 were to first-time homebuyers, who are more likely to make a small down payment, insurance volume did not follow the decline in originations. In 1993, about half of the originations were refinancings, which are less likely to require insurance.
To try to keep up volume in the shrinking market, the push last year was toward affordable-lending programs. Insurers mirror the activities of the lenders, Mr. Harting said, giving an additional impetus to mortgage insurance volume in 1994.
Private insurers gained market share since the late 1980s because banks and thrifts stopped insuring their own loans when the FDIC strongly recommended that self-insured thrifts get private insurance on loans with 10% down or less, he said.
"The FDIC wanted to shift risk out of the banking system," Mr. Harting said. "They felt banks and thrifts were not properly pricing the risk."
With recent talk in Washington of eliminating or downsizing the Federal Housing Administration program, private insurers are salivating over the possibility of privatizing the large portion of the business done by the FHA.
Mr. Harting said the question of how much private insurers will grow depends on how much of FHA's market share they would get, because there is no more self-insured bank business to be gained. He said he expects about 50% of FHA business to go to the private companies if Congress downsizes the FHA, which he said he believes will happen.
In the next few years, Mr. Harting said he expects new insurance written to decline with a decrease in originations, but he says insurance in force will continue to grow about 12% to 14% a year.
For private mortgage insurance companies to grow faster, Mr. Harting said, they would have to capture some the FHA's current business. Private insurers have absorbed almost all of the business to be gained from banks and thrifts that were formerly self-insured, and the FHA is the only other player taking some of the market.
