Are Mortgage Insurance Companies Set to Earn Huge Profits?

How has mortgage insurance affected the industry? Lender or private mortgage insurance is required on conventional mortgages that exceed 80 percent of the homes value at the time of financing. Mortgage insurance is pooled, similar to car insurance, and paid out to institutions that suffer a net loss resulting in the liquidation of a seized asset (home). It is typically calculated on the loan amount resulting in a monthly payment collected with your monthly mortgage payment. However it can be collected annually or embedded in the interest rate to mask the payment.

I personally feel that lender paid insurance hidden in the interest rate effectively hides the cost from borrowers who at times do not know they are even paying mortgage insurance. If you do not know you are paying a subsidy, how can you take steps to eliminate it?

Mortgage insurance stimulates the housing market by hedging the risk for lenders who lend money above 80 percent loan-to-value. That segment of the market would essentially dry up if not for MI companies. Along with the mortgage income tax credit, mortgage insurance encourages less savings and borrowing larger loan amounts.

As with any insurance, profit occurs when revenues exceed payouts which was not a problem during the housing boom. According to the June 2010 issue of Mortgage Banking, mortgage insurance companies have taken a beating over the last few years with default and foreclosures on the rise.

Revenues have also decreased from fewer originations, stricter guidelines, and partially due to increased government backed FHA loans that carry their own mortgage insurance. The doom and gloom has taken it's toll and continued default is a concern but there is a bright future. New revenues come from borrowers who have to provide adequate income/asset documentation and have an average credit scores of 740. Mortgage insurance companies have also increase rates to help offset losses. Any company that can continue to manage losses will reap the benefits of a tighter market in the future.

However, if MI companies have piggy-backed off the lenders stricter qualifying guidelines and increased credit scores essentially eliminate their risk, are borrowers just throwing money away and MI companies set to reap huge profits? Do they really need to exist in a steady growth economy where lenders only lend to the most qualified? Where is the risk or reason for increased premiums? The morale is to survive a mess you helped create and reap future exorbitant profits.

MICA is the trade association representing the private mortgage insurance industry. Its members include Genworth Mortgage Insurance Corporation, Mortgage Guaranty Insurance Corporation, PMI Mortgage Insurance Co., Radian Guaranty, and Republic Mortgage Insurance Company.