Investors concerned that cuts to Federal Housing Administration insurance premiums will negatively affect the private mortgage insurance market may do well to take some advice from Green Bay Packers quarterback Aaron Rodgers and R-E-L-A-X.
Market observers, as well as executives from the PMI firms themselves, argue that concerns are overblown because the customer segments for each product are different.
"We think the price decrease is targeted at borrowers with credit scores of 700 or less, and it is not targeted to credit scores of 700 or above, so we think that private mortgage insurance is going to continue to be competitive [at the higher end of the market]," Teresa Bryce Bazemore, president of Philadelphia-based Radian Guaranty, said in an interview.
If anything, the plan to reduce the FHA's annual MI premium by 50 basis points, to 85 basis points, should be a modest positive for the overall housing market because the cut will make mortgages more affordable for more borrowers, especially those not served by the private market, according to a report from Keefe, Bruyette & Woods.
It is believed only between 10% and 15% of private mortgage insurance is written on lower credit score borrowers, KBW analyst Bose George added in an interview. The FHA already has a price advantage in providing mortgage insurance to borrowers whose credit score is below 680; this is an area where the private MIs have done little business in recent years as they concentrate on the higher credit score borrowers.
When word of the FHA's plans came to light on Jan. 7, the four stand-alone publicly traded mortgage insurers (along with Genworth, where MI makes up a significant portion of its business), all saw their stock prices tank in a selling frenzy.
The stock prices recovered some ground by the end of the day, but still, Essent shares plunged 7% from the previous close, to $23.50. Radian and National MI shares both fell by roughly 4%, to $15.85 and $8.34, respectively.
MGIC shares dropped 2.8%, to $8.72, while Genworth fell 2.6%, to $7.83.
In the days since, trading volume on three of these stocks has normalized. National MI had similar volume to Jan. 7 on Jan. 8, while Genworth, whose primary business is life insurance, actually had higher trading volume on both Jan. 6 and Jan. 8.
The private mortgage insurers have been working to make their products more competitive at the lower end of the credit spectrum, particularly for first-time home buyers, Bazemore said. The question is whether PMI firms will lose the inroads they've made in that market if more first-time buyers chose FHA loans, she continued.
"This seems to be inconsistent with the message the government sent about shifting back to having more [private] capital at risk," Bazemore said.
Meanwhile, the Federal Housing Finance Agency is considering reducing the loan level price adjustments and
guarantee fees charged on conforming mortgages bought by Fannie Mae and Freddie Mac. LLPAs could raise consumers' interest rates by between 50 and 75 basis points. But if those were cut, the private MIs would become more competitive with FHA, even though these are not "apples-to-apples with the FHA premium," Bazemore said.
Another aspect of FHA policy that remains squarely in the favor of the PMI firms is that borrowers must pay for mortgage insurance throughout the life of the loan, while PMI can be cancelled once a mortgage's loan-to-value ratio is below 80%. That could be the tipping point that steers borrowers toward GSE loans, Bazemore said.
The extent that the PMI companies are concerned varies.
"While we are disappointed with this news and believe it is counter to the administration's objective of bringing private capital to the industry, we also believe the change will have a minimal impact on what we insure," said Katie Monfre, a spokesperson for Milwaukee, Wis.-based MGIC. "Private mortgage insurance will continue to have a payment advantage in many categories and will remain a faster, easier execution than FHA. Even when the FHA payment is the same or lower, we retain our primary advantages of cancelability and faster building of equity."
Still, at least one private MI is worried about losing business to FHA.
Reducing FHA MI premiums for all borrowers, rather than just aiming the cut at underserved consumers, will result in those who qualify for non-government MI to instead seek FHA loans, United Guaranty Corp., the Greensboro, N.C.-headquartered private mortgage insurer owned by American International Group, said in a statement.
"Not only does this move mean the government is taking on additional risk when numerous companies backed by private capital are willing and able to provide private MI to qualified borrowers, but many families are going to be locked into FHA MI that doesn't suit their needs as well as a traditional mortgage backed by private MI," said United Guaranty's President and CEO Donna DeMaio. "A more sensible policy would be for FHA to stay true to its mission of helping underserved borrowers who truly would not be able to buy homes without government-backed MI."
And the FHA premium cut could mute demand for the government-sponsored enterprises' recently-announced 3% down payment programs, which are required to carry private mortgage insurance though any changes to the LLPA policy and other factors would likely counter that, Bazemore said.
Radian and the other PMI companies will remain competitive with the 3% down payment loans for borrowers who have credit scores above 720, although it will be more difficult to compete if the FHFA doesn't take action regarding the LLPA and G-fee policies, Bazemore added.
But since the 3% down product is still new, KBW's George doesn't consider that volume existing business that could shift to FHA, but rather new incremental business that the private MIs now might not gain as a result of the FHA policy.
"That business is going to be somewhat challenging for the MIs to do now," George said.
Whether the FHA premium cut simply shifts the existing flow of volume away from the private MI firms to FHA loans or results in new borrowers entering the market remains to be seen, and will depend more on underwriting guidelines than loan pricing, Bazemore said.
When borrowers are considering an FHA or GSE mortgage, they need to consider all applicable fees, including MI premiums and the Ginnie Mae securitization fee for FHA loans, and PMI premiums, G-fees and LLPAs for GSE loans. "All of those pieces have an effect on where any of this ends up on any particular given loan," Bazemore noted.
If the lower FHA premiums prove popular, it may actually cause interest rates on the loans to rise, as investors have already begun reevaluating prepayment speed assumptions for Ginnie Mae securities, said Brent Nyitray, who is the director of capital markets at Stamford, Conn.'s iServe Residential Lending.
The lower-priced FHA loans may spur refinance activity, which has already prompted increased trading of Ginnie Mae securities and interest rates on loans to be sold into Ginnie securities to rise thus offsetting some of the benefit of lower MI premiums.
For individual borrowers, determining whether an FHA-insured loan or a conventional mortgage with PMI will vary on a case-by-case basis, Nyitray said.
"This is going to be a moving target because prepayment assumptions change as overall interest rates change," he said.