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Executive Conversation: David Gansberg on managing risk under the new DTI ratios

Arch MI's RateStar continuously responds to changing variables for flexible underwriting

Executive Conversations is a HousingWire web series that profiles powerful people in the financial industry, highlighting the operations and the people that make this sector tick. In the latest installment, we sit down with David Gansberg, CEO of Arch MI, to discuss how Arch MI is adjusting to new DTI levels.

Q. Last summer the GSEs increased the debt-to-income ratio for some borrowers to 50%. What impact has that increase had on the industry so far?

DaveA. The expanded DTI requirement has made home ownership opportunities more available for many potential buyers, especially as it applies to eligible loans with down payments as low as 3%. Some observers initially put the anticipated increase in home loans at 95,000, as more low- and moderate-income borrowers would now be able to qualify.

The risk represented by these loans has also increased. Studies have shown that the risk of default for borrowers with DTI ratios between 45% and 50% is higher than for those with a median DTI level of 35%.

Q. How is Arch MI responding to the increased risk of that higher debt-to-income ratio?

A. Arch MI strongly supports the expansion of sustainable home ownership and affordable lending, safeguarded by disciplined underwriting. DTI is a key loan characteristic and risk factor for pricing mortgage insurance in RateStar, our risk-based pricing tool. Because we price our MI coverage through RateStar, we are able to underwrite and responsibly insure loans with DTI ratios over 45% and a credit score under 700.

Q. How does RateStar help you better manage risks as the credit box gets wider?

A. Arch MI RateStar is the industry’s only true risk-based pricing solution. It more precisely measures loan-level risk by taking into account multiple rating variables, including DTI. Consequently, its risk model is continuously responsive to changes in the industry landscape like the expansion of DTI. Arch MI is therefore better positioned to manage risk and maintain flexible underwriting guidelines that align with customers’ mortgage originations. Lenders in turn will be able to compete more effectively in the marketplace and help protect their own risk exposure.

Q. Experts are predicting as many as four rate hikes this year. How can Arch MI help lenders in a rising rate environment?

A. Lenders are under increasing pressure this year because housing inventory continues to be limited, rates are going up and the credit box is still pretty tight. Arch MI understands the environment lenders are operating in, which is why we’ve developed a number of ways to help. I’ve already talked about RateStar, which goes beyond the traditional mortgage insurance characteristics, taking into account other risk factors to match the loan to Arch MI’s most competitive rates, so originators may compete more effectively, qualify more borrowers and close more loans.

In addition, in 2015 we launched Arch Mortgage Guaranty Company (AMGC) specifically for mortgage loans that originators intend to retain in their portfolios or include in private securitizations. AMGC is a separately capitalized entity not subject to GSE requirements and it is uniquely positioned to insure various types of prime, standard and non-standard mortgages.

Arch MI has a commitment to real innovation and we will continue to leverage our solutions to transform and expand lending horizons for our customers.

Q. What do you see as the biggest challenge facing the industry in the near term?

A. There are actually several challenges for the mortgage industry in 2018. The combination of pressure from rising interest rates and a shrinking market for originations means that finding avenues for profitable growth will be top of mind for most lenders. They’ll also be focused on navigating the potentially volatile landscape of housing finance reform, as discussions continue in Washington, D.C. Finally, the entire industry will be trying to identify ways to promote home ownership and help first-time homebuyers achieve the American Dream.







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