The U.S. House Financial Services Committee recently met with private mortgage insurance (MI) experts comparing private sector and government-subsidized approaches. This Housing Wire article cites Milliman’s Ken Bjurstrom testimony to the committee.
Here is an excerpt from the article:
Private mortgage insurers are ready to play a role in the housing finance market, but that won’t happen until federal housing agencies strike the appropriate balance between private insurers and the Federal Housing Administration (FHA), industry representatives claim.
Experts met on Wednesday [March 13] and suggested to members of the House Financial Services Committee that private mortgage insurers have the ability to play a significant role in mortgage finance.
…Kenneth Bjurstrom, principal and financial consultant for Milliman, recommended that the FHA evaluate and adopt various private mortgage insurance standards, specifically the MI’s accounting provisions.
Bjurstrom also advised FHA to better understand and modify its risk exposures and “retain the necessary capital that is required to protect the program now and for the next economic downturn that will most definitely occur again,” he said.
Here is Bjurstrom’s testimony concerning mortgage insurance operations:
The key objective of the ratemaking process is the estimation of the costs associated with the transfer of risk effected by issuing mortgage insurance policies. Historically, mortgage insurers have generally used the size of the down payment or loan-to-value, product type such as fixed rate or adjustable rate and the amount of coverage in their underwriting and ratemaking approach. Relatively recently, private mortgage insurers have expanded their premium rate programs to recognize the importance of borrower FICO Scores and other factors.
In contrast, the FHA currently utilizes fewer tools available to them to financially manage mortgage insurance exposures. The FHA insures 100% of the potential claim loss, compared to generally 25% to 35% for private mortgage insurers, and the FHA charges the same premium rates for all loan product types and borrower FICO Scores. Without a more granular approach to ratemaking the FHA may be encouraging adverse selection with respect to obtaining FHA mortgage insurance protection.
Ratemaking for mortgage insurance should take these factors into account and take a long-term view of pricing while also considering the important roles adverse selection and changes in the underlying insured risks. The adverse selection effects of alternatives to mortgage insurance coupled with the potential for future boom and busts in the housing market add to the operational challenges of mortgage insurance industry.
To read Bjurstrom’s entire testimony, click here.