Risk Management

PMI Insurer Seeks Cover

The parent of Mortgage Guaranty Insurance Corp. announces that it will no longer offer an insurance product to lenders that leaves it holding the b...
Stephen TaubSeptember 26, 2008

In a sign of further fallout from the housing market meltdown, mortgage insurer MGIC Investment Corp. announced Friday that its subsidiary, Mortgage Guaranty Insurance Corp., is eliminating one type of coverage that it offers to lenders.

MGIC provides private mortgage insurance, which homebuyers typically must pay on a monthly basis if they put down less than 20 percent when purchasing their house. PMI payments typically continue until the homeowners’ equity in the house reaches 20 percent. MGIC, badly burned by the subprime-mortgage market meltdown, says it will no longer take on new business under what it calls “excess of loss reinsurance treaties.” That’s a reference to an insurance arrangement in which an insurer like MGIC and a lender’s own captive insurer share premium revenue. If a borrower defaults, the PMI insurer takes the initial loss, while the lender’s captive insurance unit absorbs the secondary loss up to a prescribed limit. Additional losses above that limit are absorbed by the PMI insurer.

MGIC said it will no longer write this type of insurance after the end of this year. Existing reinsurance contracts will run through the end of the year. However, the company said it would continue to write “quota share reinsurance.” Under those deals, insurers and lenders agree to split losses at set percentages, regardless of the size of overall losses.

As at other mortgage insurers, financial woes at MGIC Investment and its subsidiary were early harbingers of the mortgage crisis. The parent and its subsidiary have taken a number of actions this year to improve their financial position, including raising $840 million through securities sales, changing underwriting guidelines, increasing premiums, entering into a reinsurance agreement covering new business written beginning in April 2008, amending their bank credit facility, and selling MGIC’s stake in Sherman Financial.