Old Republic Proposes Plan To Ease Insurer Woes In Next Crisis
May 27 2011 - 12:26PM
Dow Jones News
Taking the bad with the good long has been a fact of life for
U.S. mortgage insurers. But now, as the industry struggles through
the toughest patch of its five-decade history, one long-time
executive is shopping a proposal that would help mortgage insurers
the next time the housing market implodes.
The only problem: Easing mortgage insurers through the bad times
would require them to sacrifice some of the outsized profits they
enjoy when the housing market is healthy.
The plan, put forward by Aldo Zucaro, chief executive of Old
Republic International Corp. (ORI), calls for mortgage insurers to
create a mutual reinsurance company. The reinsurer would collect
premiums from each of the rival mortgage insurers, and then cover
their losses when a housing crisis hits.
"There's bound to be another catastrophic period," Zucaro said.
"In this industry, you get some very good years and
then--whamo--you get hit and you better have the money to weather
the storm."
Zucaro is putting forward the plan as Congress and the Obama
administration consider ways to reform the mortgage-finance market
and wind down government-controlled mortgage giants Fannie Mae
(FNMA) and Freddie Mac (FMCC), whose government takeover has cost
taxpayers about $138 billion so far. The mortgage-insurance
industry, which insures loans sold to Fannie and Freddie, has paid
$22 billion to the two companies since 2007, according to an
industry trade group.
Whether other mortgage insurers will agree to Zucaro's plan is
an open question. Spokespeople for some of the leading mortgage
insurers, including MGIC Investment Corp. (MTG), PMI Group Inc.
(PMI) and Genworth Financial Inc. (GNW), had no comments on
Zucaro's proposal, though a few said they were reviewing it.
"We are going to have some further discussions with the key
players in the industry," Zucaro said.
Mortgage insurers sell protection on home loans where a borrower
has put down less than the standard 20% down payment. The insurance
is typically paid for by the homeowner, but claims are paid to the
lender if the borrower defaults.
The promise to reimburse lenders on defaults has proven to be a
costly one in recent years. Mortgage insurers sold too much
underpriced coverage as the housing bubble inflated, and the
industry has lost more than $15 billion since 2007 as it made good
on its policies.
At the same time, the industry has ceded much of its market
share to the government's Federal Housing Administration. So even
though mortgage insurers have tightened underwriting standards and
raised prices, profits from new policies so far haven't been enough
to offset losses from the older ones. Many who track mortgage
insurers don't expect the industry to report a profitable year
until 2013.
By then, Zucaro estimates mortgage insurers will have paid
nearly twice as much in claims as they collected in premiums over
the six-year length of the crisis.
The smallest publicly traded mortgage insurer, Triad Guaranty
Inc. (TGIC), was forced to stop selling new policies in 2008 when
its capital ran short. Many of the others have been forced to get
waivers from state insurance regulators to continue selling new
coverage, and drastically have diluted long-time shareholders when
they issued new stock while the shares were near historic lows.
Zucaro said a mutual reinsurer would help companies avoid such
pitfalls. As outlined in a white paper Old Republic has distributed
across the industry, the mutual would begin paying struggling
mortgage insurers in the next housing crisis when the industry, on
average, is paying out more than it's collecting in premiums. In
the interim, the mutual would build reserves by charging mortgage
insurers based on how much they insure and how risky their policies
are judged to be.
In the 55 years since MGIC founded the first modern-day mortgage
insurer, the industry has gone through one other period of paying
out more in claims than it's collected in premiums. From 1985 to
1989, mortgage insurers paid out roughly 30% more than they earned.
Old Republic posits the mutual reinsurer would have almost 20 years
to build up billion of dollars in reserves before another housing
calamity strikes.
Collecting the reserves would require the mortgage insurers to
pay roughly 20% of their premiums to the reinsurers, cutting into
insurers' profits. But Old Republic calculates that would be about
what's needed to build a large-enough reserve fund over nearly two
decades to reimburse mortgage insurers if the next crisis is as
large as the current one.
Had the plan been in place since the last housing crisis ended,
"we would obviously have had much lower earnings in the good years
because you would have eliminated those times when we had 18% and
20% or more returns on equity," Zucaro said. "But we still would
have produced an 11% or 12% return on equity, which in the
property-casualty business is a very decent result."
State insurance regulators would have to sign off on the plan.
Representatives for the insurance regulatory offices in the key
mortgage-insurance states of North Carolina, Pennsylvania and
Wisconsin also declined to comment or didn't respond to requests
for comment.
Freddie and Fannie would also need to agree.
"We believe that the regulators like the concept," Zucaro said,
"but in both cases they would prefer to see the industry come
together and agree to the concept."
-By Erik Holm, Dow Jones Newswires; 212-416-2892;
erik.holm@dowjones.com
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