DS News - Digital Archives

to damage, and banks looking to protect their assets sought and continue to seek REO insurance. While REO insurers may have experienced an increase in business over the past few years, the sector is not without its challenges. "The occurrence of claims due to vandalism, theft, and severe weather continue to be of concern," according to John Watt, VP at Innovative Risk Solutions, Inc., a DeBary, Florida-based provider of insurance for lenders and real estate investors. "The prices for collateral protection will rise if losses due to vandalism and theft cannot be controlled," he added. REO insurance remains relevant, but the recent uptick in REO purchases by institutional investors is shrinking some lenders' REO portfolios. "We are seeing an emergence of non-performing note buyers and property buyers in the form of institutional buyers and real estate investment trusts," Watt said. The market for REO insurance may continue to decline—though not disappear—due to tightening credit and strict underwriting standards. As such, "there will likely be fewer forceplaced and REO properties to insure in the future," Watt said. However, a shift from REO insurance does not mean a drop in business for companies such as Innovative Risk Solutions. "Rental property portfolios tend to grow in this environment," Watt said. Private-Public Collaborations While a new script is not yet written for the future of housing finance, the Federal Housing Finance Agency (FHFA) and the FHA are already taking steps to limit their risk exposure and scale back their presence in the market. Several private mortgage insurers are working in concert with the agencies to establish a path forward and to support affordable housing in the current market. "Van Wagenen has actively participated with the FHFA regarding establishing new guidelines and policies for our industry in how our products and services are delivered to the GSEs' seller/ servicers," said Ron Paulin, VP of financial institution sales at Van Wagenen Financial Services, a mortgage insurer based in Eden Prairie, Minnesota. Genworth has also worked with the GSEs. In fact, the company recently announced changes to its underwriting guidelines to align with GSE standards. Loans with loan-to-value ratios of up to 97 percent and FICO scores down to 620 approved by the GSEs "are also likely to be approved for mortgage insurance coverage by Genworth USMI [U.S. Mortgage 52 Insurance]," the company stated in a press release in September. Alfred King, a spokesperson for Genworth USMI, expounded on the company's September announcement. "These adjustments position Genworth USMI to pursue prudent growth and allow lenders to continue to offer affordable low down payment financing to support the growing home purchase market," King said, adding that Genworth has controls in place to monitor key risks. New Regs Set Stage for New Season A new regulatory environment is already forming as the Consumer Financial Protection Bureau finalizes several rules set for implementation in January. In a second-quarter earnings call for MGIC, Curt S. Culver, chairman and CEO of the company, suggested the qualified mortgage (QM) rule will have little impact on the current market. "We estimate that 99 percent of our new risk written in the last several quarters would have met the QM definition," Culver said. Another regulation that has received much media attention—Basel III—is also of little concern to Culver as it "left the treatment of private mortgage insurance unchanged, which is a win for our industry," Culver said. As the regulatory atmosphere continues to take shape, "one thing we know to be certain is that the changes will continue and that adaptability is going to be important as this market continues to evolve," said Jennifer Montville, marketing manager at Van Wagenen. "Our focus is on staying on top of regulation and requirements so our partner clients know they have a trusted business partner they can rely on," she said. "At the same time, we are expanding offerings so we can stand with clients as a partner in growth by providing products and services that help them generate revenue." Montville says revenue generation remains a central focus. "No matter how much attention compliance is getting these days, revenue generation has never taken a back seat," she said. Government Moves out of Spotlight As the government eases its position and fades to the back of the stage, private insurers are eager to step into the spotlight. "I think our markets can thrive in a market where the government has a more minimal role," Watt said. In the FHFA's Strategic Plan for 2013 through 2017, the agency stated, "Although some mortgage insurers are facing financial challenges, others may have the private capital capacity to insure a portion of the mortgage credit risk currently retained by the Enterprises. Deeper mortgage insurance coverage on individual loans or through pool-level insurance policies could expand the amount of risk mortgage insurers carry." Meanwhile, the FHA increased its down payment requirements and raised premiums, making private mortgage insurance more appealing to lenders. "Due to FHA's recent price increases and policy changes, private [mortgage insurance] now is less expensive than FHA coverage—upfront and over the life of the loan—for nearly all borrowers who make more than a 3.5 percent down payment on a loan up to $625,000," King explained. The private market is ready to step in and provide affordable coverage for lenders. "As a result of the numerous changes made by both private and public mortgage insurers over the last year or so, our industry has continued to regain market share from the FHA, and we expect our industry's market share to grow from the first-quarter level of 10 percent to 11 percent over the balance of the year," Culver said. According to King, the private market grew its share of the originations market to about 7 percent last year. "Our lender customers consistently tell us they are moving back toward private [mortgage insurance] usage from FHA, and the numbers bear that out," King said. "We expect the administration to continue with its plans to encourage the use of private capital to take more upfront risk and reduce the government's role in the housing market," King said. Congress' New Script for Housing As the market plods toward a full recovery, all eyes are on the government to finalize a new script for the housing finance system, eager to see if the long drawn-out drama of the past few years will have a satisfying ending. While Congress continues to deliberate on proposals for the future of housing finance, sentiment in the private insurance market is confident and hopeful. In his second-quarter earnings call, Culver said in all the proposals he has seen, "there is a role for private mortgage insurance." "Exactly what their role is, however, has not been defined," he said. "But they all seem to be positive for our industry." One proposal reportedly gaining momentum in Congress, the Housing Finance Reform and Taxpayer Protection Act, co-sponsored by Sens. Bob Corker (R-Tennessee) and Mark Warner (D-Virginia), calls for the closure of Fannie Mae and Freddie Mac over a period of five years. While the bill does include a government guarantee, it puts the private market out in front. The private market would absorb the first 10 percent of any future losses. The senators anticipate this 10 percent first-loss position would be more than enough to cover any future housing downfalls. In fact,

• Cover