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Lending

Tight credit standards, high FHA rates could be a boon for private mortgage insurers

Market share has nearly tripled in four years

Money dollar bill house

For many potential homebuyers, obtaining a loan is difficult. Tight credit standards make it difficult to qualify for a loan and many buyers are unable to save up enough money to provide a substantial down payment. That knocks a lot of potential buyers out of the market.

One way that a buyer can make it easier to get the necessary credit from a lender is agree to purchase mortgage insurance. That allows for the borrower to put up a smaller down payment to obtain the loan and provides the lender with security in case the borrower defaults.

That’s crucially important for younger buyers, especially those that are struggling to save because of student loans or the high cost of rent.

One way that buyers can obtain mortgage insurance is through the Federal Housing Administration, but the FHA’s high MI premiums have come under fire recently from the National Association of Realtors and others. In April, NAR President Steve Brown wrote to FHA Commissioner Carol Galante, saying, “NAR urges FHA to lower the annual mortgage insurance premiums and eliminate the requirement that mortgage insurance is held for the life of the loan.”

Galante responded and said that now is not the time to roll back the premiums and that the FHA’s MI rates are “priced appropriately.”

Those factors, plus a favorable shift in demographics could lead to growth opprotunities for private mortgage insurers, according to Bradley Shuster, president and CEO of NMI Holdings, Inc. (NMIH).

NMIH is the parent company of National Mortgage Insurance Corp., which issued its first mortgage insurance commitments a year ago.

“We expect that the recovery in the housing market and the resulting increase in purchase originations mean that private MIs should see a boost in business,” Shuster told investors this week.

“Based on median home prices across the country, research shows that it takes the average first time home buyer 14 years to save a 20% down payment for a home,” he said. “By providing the credit enhancement needed for lower down payment mortgages, private MI can reduce the time it takes a borrower to save a down payment to under six years.”

Shuster said that the population of younger buyers will be increasing in the next decade. He said that private mortgage insurers will be well positioned to capitalize on that growth.

“First-time homebuyers represent a critical segment of the home purchase market, and a considerable opportunity for private MIs,” Shuster said. “Approximately 33% of all GSE-securitized purchase mortgages in the first half of 2013 were first time homebuyers. Statistics show that the average age of a first-time homebuyer is 34 years old, and an increasing number of Americans will turn 34 nearly every year over the next decade. In fact, over 40 million Americans will reach that age in the next 10 years.”

While overall mortgage originations have decreased, the rate of purchase mortgages is increasing and refinances are dropping. “MI penetration is traditionally four times higher in purchase mortgages than in refinances,” Shuster said.

And with purchase originations expected to hit the highest level since 2008, private mortgage insurers are about to be in prime position to reap the benefits.

According to Shuster’s presentation, private mortgage insurance made up 38% of the total mortgage insurance industry in the fourth quarter of 2013. That’s nearly three times as much as it was in 2009, when private MI was only 15% of the market. In fact, private MI has been on a steady climb for the last three years.

Shuster told investors that the growing demand is going to require more capital. Shuster said that National MI estimates that the industry requires $1.5 billion to $2.1 billion of additional capital each year.

Despite Galante’s statement, the FHA announced a new program this week that offers discounts on its MI premiums if the buyer attends housing counseling.

It appears that the battle between the FHA and private mortgage insurers is about to get a lot more interesting. 

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