When Fannie Mae starts talking about making a trillion dollars of loans to borrowers of modest means, Jim Miller, president of Commonwealth Mortgage Assurance Corp., smiles broadly.

"Most of those people will be prime prospects for mortgage insurance," says the man who runs the nation's sixth-largest private mortgage insurer.

Indeed they will. It is his company, and industry, that is in the business of insuring, and making marketable, loans to borrowers who make small down payments

Great Opportunity Seen

As politicians and secondary-market chieftains throw around ever-great numbers about the loans they intend to facilitate, Mr. Miller and Philadelphia-based Commonwealth stand at the center of a movewment that may provide them with great opportunity -- and more than a little risk.

Companies such as Commonwealth Mortgage Assurance insure payment of a portion of the interest and principal on loans with down payments less than 20%. Not every consumer who needs mortgage insurance is of modest means. Indeed, the world is full of plastic surgeons who are leveraged to the hilt. But every borrower who is of low or moderate income is going to need mortgage insurance in some form.CommonwealthAt a GlanceHeadquarters Philadelphia Spun off fromBackground Reliance Insurance in October 1992 Insurers principal and interest onBusiness mortgages with low down paymentsVolume $9.1 billionMarket share 6.3% Sixth-largest inRank the industryCredit rating AA for claims-paying ability

$1 Trillion Anticipated

The number of these types of loans that Fannie Mae and Freddie Mac hope to make in coming years is not small. "Think of it," said Mr. Miller, referring to Fannie's fair-lending initiative. "One trillion dollars by the end of the century. That's $150 billion a year. The industry only insured a little less than $200 billion" in all of last year.

To Mr. Miller and others in the industry, those are some enticing numbers.

If, as some believe, the mortgage insurance industry is about to enter a period of brisk growth, it is a good thing for Commonwealth that it comes now rather than in 1991.

Back then, the story at the company was not as happy. It was suffering by being tethered to its then parent, Reliance Insurance, which had jeopardized its ratings by a large investment in junk bonds. This led to a flight of lenders chary of using Commonwealth, hurting the company.

Reliance's solution was to sell Commonwealth to the public, in October 1992.

Since then, the company has grown and captured more market share. Commonwealth insured 6.3% of all loans in 1993, up from the 5.3% market share the company enjoyed the year before. At the end of 1993 that figure had grown further, to 7.1% of loans insured in December.

Working with the Top 25

One of the main ways the company has made inroads is through capturing more of the loans made by the largest 25 originators. As a subsidiary of Reliance, Commonwealth did business with only three of the top 25. Now that number has surged to 21. "We have been extremely pleased by that increase,' said Mr. Miller.

Insuring loads of new loan is well and good, but they need to be loans that don't go bad too often.

The fair-lending arena is a good example of this double-edged sword. Could this movement lead the mortgage insurers to insure a poor book of loans?

Recently, Commonwealth and other insurers announced their willingness to insure loans with down payments as low as 3%.

So far, Commonwealth has been unable to find an investor or secondary agency to buy the loans, though Mr. Miller believes he will have a deal in place soon.

Still, the idea of a 3% down payment has raised some eyebrows -- including at the rating agencies -- among those who fear movies into such uncharted waters.

Will such loans have a high incidence of default? Mr. Miller thinks the key to avoiding problems is counseling.

Success with Program

He also noted that the company has had strong success with a program in California that allowed homebuyers to make down payments of 3% of their own funds, with the other 2% coming from a gift or grant.

"In truth, with counseling and appropriate underwriting, low-and moderate-income borrowers are just as solid as higher-income people, maybde even more so."

Robert Hottenson, an analyst at Goldman, Sachs & Co. who follows the company, is also unfazed by the new loans. He noted that the premium rate on 3%-down-payment loans will be substantially higher than on other loans, in some cases more than 30% higher. He also said that "this is not going to be a huge product."

Declines in Property Values

Another area of danger for mortgage insurers is regional declines in real estate values. Many of the top mortgage insurers took it on the chin during the Texas debacle of the 1980s, and California is now a source of pain for some.

To guard against rushing into the next Texas, Commonwealth employs a team of economists who monitor housing and employment trends.

On Mr. Miller's watch list now: Last Vegas. "Gambling is now legal in more than 36 places," he noted, but the Vegas housing market is hot.

"We try to stay out of trouble areas," he said. An appropriate credo, if ever there was one, for an insurance man.

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