Growing Trend of Mortgage Insurance Claim Denials are Costing Servicers
In the face of dwindling business, with January 2010 showing fewer new policies than any month in 2009, mortgage insurance (MI) companies are increasingly denying claims for defaulted loans that allegedly do not conform to underwriting standards, increasing costs for servicers and investors. Historically, MI rescission rates were low, generally around 7%, but in recent quarters, that rate has jumped to 25%, associate analyst Aleksandra Simanovsky wrote in the Moody’s Investors Service latest “ResiLandscape” commentary provided to HousingWire. According to Moody's, the issue came to a head in December 2009, when Bank of America (BAC) filed a lawsuit against MGIC (MGIC), claiming the insurer improperly denied claims from BofA’s servicer unit. While the lawsuit is still pending, mortgage insurers are becoming more confident in denying partial or whole claims from servicers and Simanovsky wrote the industry can expect continued high rescission rates for the future. That increase, combined with the below-investment-grade ratings of MI companies such as Radian (RDN) and MGIC “further constrain any benefits we might allow to the pool policies in RMBS transactions.” Recently, however, Radian Q409 losses narrowed to $91.9m and MGIC ramped up its level of competition with government-backed mortgage insurance by lowering its mortgage insurance rates for good credit borrowers. The surge in foreclosures nationwide is creating claims processing delays for both loan and pool policies, and MI companies are requesting more documentation from servicers, and the companies request the documents earlier, sometimes at the point of foreclosure referral, rather than after the foreclosure sale. The earlier reviews enable MI companies to detect origination fraud, including value-differences that potentially can result in denied claims, Simanovsky said. MI companies are trying to limit exposure in an environment where business continues to decline. According to data released by the Mortgage Insurance Companies of America (MICA), the 14,378 mortgage insurance policies issued in January 2010 had a total value of $4.16bn, and lower in volume and dollar amount than any month in 2009. However, MI cures — the rate of delinquent loans that are brought current — were up slightly in January compared to December. In January, more than 98,000 loans defaulted, the highest rate since January 2009, MICA said. MI companies are taking a harder look at expenses for property preservation and utility bills and many times, servicers’ claims are denied because the MI companies claim the expenses are not “reasonable and customary.” In addition, servicers are receiving reduced reimbursements on tax and insurance advances that result from extended holding times. “As unsold home inventories continue to build and as foreclosure and REO timelines grow longer, losses to securitized trusts are expected to increase to the extent that MI companies are not covering such expenses,” Simanovsky wrote. With servicers conducting extensive loss mitigation strategies, MI companies are often denying claims for modification documentation-preparation fees and accrued interest associated with modification-processing delays. The document preparation and legal operations costs for servicers has increased dramatically, but these expenses, which historically have not been contested, are now being denied by the MI companies as “costs of doing business,” Simanovsky said, adding in cases where modification efforts are not successful, the unreimbursed costs associated with the modification process are assumed by the servicer. While the BofA-MGIC lawsuit continues to play, Moody’s believes servicers’ rebuttal efforts “will be less forceful and will have little impact on claim denials. RMBS transactions that carry pool policies (partial or full) are likely to receive little benefit from them,” the report said. Write to Austin Kilgore.