Mortgage insurer United Guaranty, a subsidiary of American International Group (AIG), is heading into 2013 reporting profits for the first three quarters of 2012 and reporting a lower delinquency ratio for the past five quarters.
Kim Garland, chief executive officer of United Guaranty, recently said the company's delinquency ratio over the past five quarters has dropped to 9.6% of its book of business. That drop is driven by the company's focus on getting past legacy claims from books of business written prior to 2009 and is the result of the firm leveraging the power of its new book of business, which features strong pricing and underwriting guidelines associated with the underlying loans.
Yet, Garland, like the heads of other mortgage insurers, is steering into uncharted waters as the mortgage insurance industry is the expected to follow new Dodd-Frank rules, including the qualified-residential mortgage and qualified-mortgage rule.
"The next year or two will be important for mortgage insurers and the mortgage industry in general," Garland said in an interview with HousingWire. "Post-election, I think progress will start being made in structuring and designing the system of the future."
Garland envisions a future where the company will keep its risk-based pricing methods as a hallmark of the United Guaranty brand.
"The majority of our time is being spent on ensuring that we are a best in class risk manager for mortgage insurers," he added. "We are spending time on our pricing and trying to make that more predictive."
Garland added that the firm is focused on underwriting, so it can make that part of the process more predictive, establishing the brand as one that prices in risk early on.
"In January 2010, we rolled out our first version of risk-based pricing," he said. "It takes a look at all of the factors and says if you have a lower-risk loan, we will charge you less for mortgage insurance. If you have a higher risk, we charge you more for mortgage insurance."
The firm as it grows its book of business has expanded from capturing an 11%-to-12% market share to 30% of the market. At the same time, the mortgage insurance industry continues to deal with the struggles of other firms such as The PMI Group, which was eventually taken over by its regulator.
Garland's risk-based pricing strategy also shows a company focusing on the quality of its new loan vintages. The expected claim rate on new vintages of loans post-crisis is estimated at 1% to 2%, much improved from five or more years ago when the claim rate hovered in the 10% to 20% range, Garland said.
Garland says the credit score "increased by about 60 points on average," and now 55% of the company's loans are full-documentation loans.
In addition, 90% of the mortgages insured today as new business at United Guaranty are fixed-rate mortgages.
"I think our market share increase has been driven by implementation of risk-based pricing," Garland said.
"Traditionally, mortgage insurers all had very similar, if not identical, pricing algorithms."
United Guaranty is focusing on gaining business through risk-based pricing.
"Lenders and loan officers started saying if I have a borrower with a better risk profile, I can save them money by selling them United Guaranty," Garland added. "We started winning a much higher percentage of these high quality loans."
While the mortgage space and TBA market remain virtually undefined heading into 2013, Garland believes MI will find a place as long as the focus continues to be on the eventual transfer of risk from the government to the private market.
"Every proposal that we have seen shows private capital in a first-loss position," Garland added. "I think one of the options in the FHFA paper was deeper coverage," he said. And part of that was having the private insurer capture 80% of the risk. "We have the capacity and the appetite to play in that world, and it would be a minimally disruptive way to get more private capital (back into the market)," Garland suggested.