Marc Guzman's West County Blog
On October 22, I reported that the Arizona Department of Insurance took over the PMI Group. Well last week, the PMI Mortgage Insurance group filed for bankruptcy protection. So what does this mean for you and what does it mean to the housing market? Well let’s first start with the history of PMI.
PMI stands for Private Mortgage Insurance. When a property is purchased and the borrower has less than 20% down payment, the lending institution will require this type of insurance in case of default from the borrower. Well as you can imagine, during the housing boom between 2002 and 2007 there were many policies issued on bad loans. When the housing market crashed, lenders were quick to file claims and recover as much of the their losses as possible.
So what happens when all policy holders decide to file claims at the same time? AIG happens. PMI Mortgage Insurance Group became inundated with so much debt obligation that they had to file for bankruptcy protection. The leverage ratio of PMI Mortgage Insurance Group exceeded 50-to-1. To put this into prospective, Lehman Brothers at the time it failed in 2008 was leveraged 31-to-1.
On the side: Read my article about FHA needing a bailout in the next 12 months. FHA is currently leveraged 423-to-1. Sorry people, this is not a typo and yes I said 423-to-1. FHA insures over $1.1 Trillion outstanding loans yet only has $2.6 Billion in reserves. What has history taught us, especially recent history? Do not over leverage. I’ll let you make your own decision on whether or not FHA should increase their market share.
Sorry, I digressed. Going back to the PMI Mortgage Insurance Group.. Now that a major player in issuing insurance for many home buyers is out of business, what will happen to the housing market? Well probably nothing. There are still other big mortgage insurers in business and they will take over the slack. The good news for them is that issuing insurance nowadays is very low risk. Lending Institutions have very strict qualification guidelines and with home values at more affordable prices, the risk of a buyer defaulting is low.
