Magazine article American Banker

Mortgage Insurers in Boom, but High Risks Could End It

Magazine article American Banker

Mortgage Insurers in Boom, but High Risks Could End It

Article excerpt

Mortgage insurance companies are racking up their best volume and profits ever but could be riding for a fall in the not-too- distant future, a new study finds.

The reasons:

* Insurers are carrying more risk by backing borrowings with higher loan to-value ratios.

* An increase in interest rates could force a larger commitment to variable-rate loans, which are more volatile than the fixed-rate mortgages the companies more frequently insure.

* Many of the thousands of loans that were insured in California during its tailspin years of 1990 to 1994 may very well sour, the study says.

Duff & Phelps Credit Rating Co. sounded the warning in a report issued this month. The 30-page report considers the pros and cons of the mortgage insurance business and examines major companies in the field.

Private mortgage insurance is required by lenders when borrowers put up less than 20% of their loan amount. Mortgage insurers act like other underwriters - assuming risk in exchange for payments. Right now, mortgage insurance companies are well ahead of defaults, the study found.

"The industry is in the best shape it has ever been in," wrote analysts Donald H. Paston and Ralph R. Aurora.

There are nine primary insurers - including General Electric Mortgage Insurance Corp. and PMI Mortgage Insurance Co. - that lenders access on behalf of borrowers. These insurers have total assets of $6.4 billion and loss reserves of $1.2 billion, the Duff & Phelps report states. Well managed expense and loss ratios contribute to the companies' strengths, the study said. …

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