May 22, 2001

2003 CAS Annual MeetingPrivate Mortgage Insurance

Industry Update

Presented by: Kyle Mrotek, A.C.A.S., M.A.A.A.New Orleans, LANovember 12, 2003

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Private Mortgage Insurance (PMI) Industry Update

Activities Reinsurance, Bulk Transactions, GSE’s

RegulatoryTaxes, RESPA Reform, GSE Reform

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PMI Industry UpdateActivities

ReinsuranceCatastrophe protectionCaptive reinsurance

Banks and mortgage lenders establish captive reinsurance companies

Captive reinsurers assume mortgage insurance risk on loans originated by lender and affiliates

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PMI Industry UpdateActivities

Reinsurance (cont.)Captive reinsurance (cont.)

Captive mortgage reinsurance is only about 10 years old

Captives typically monoline like primary companies

Isolated trust for each cedantMuch growth, both in captive counts and

premium ceded

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PMI Industry UpdateActivities

Reinsurance (cont.)

Number of Lender Reinsurer Trusts with Ceded PremiumIndustry (excluding one company) 1998-2002

70

140

185 195

252

3467

89 94112

0

50

100

150

200

250

300

1998 1999 2000 2001 2002

Calendar Year

Nu

mb

er o

f C

apti

ves

Total Trusts

LenderReinsurers

Source: Schedule F

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PMI Industry UpdateActivities

Reinsurance (cont.)Dollars of MI Premium Ceded to Lender Reinsurers

Industry (excluding one company 1998-99) 1998-2002 ($Million's)

4397

213

313

442

0

100

200

300

400

500

1998 1999 2000 2001 2002

Calendar Year

$Mil

lion

's o

f Pre

miu

m

Source: Schedule F

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PMI Industry UpdateActivities

Reinsurance (cont.)

Percentage of MI Premium Ceded to Lender ReinsurersIndustry (excluding one company 1998-99) 1998-2002

1.8%

4.3%

7.4%9.3%

11.7%

0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%

1998 1999 2000 2001 2002

Calendar Year

Per

cent

age

of P

rem

ium

Source: Schedule F

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PMI Industry Update Activities

Reinsurance (cont.)Captive reinsurance (cont.)

Typically aggregate excess of loss contracts Example: Reinsurer assumes layer 5%

excess 5% of coverage for 25% of written premium

Quota share contracts exist too, but less frequent

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PMI Industry Update Activities

Reinsurance (cont.)Captive reinsurance (cont.)

Cede trends Began relatively small (e.g., layers of

coverage for 15%-16% of written premium)

Trended to deeper cedes (e.g., layers of coverage for 35%-40% of written premium)

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PMI Industry Update Activities

Reinsurance (cont.)Captive reinsurance (cont.)

Cede trends (cont.) More recently, industry leaders announce

intent to reduce cede %’s

– Reasons cited

o Risk/reward balance, and

o Profitability objectives

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PMI Industry Update Activities

Bulk TransactionsLoan-level coverage written on pools of loans,

often for securitization marketReporting of bulk transactions beginning 3rd

quarter 2001, so little history available.Large portion of involvement based on subprime

loans (source: Inside Mortgage Finance)

Analysts keeping close eye on bulk losses

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PMI Industry Update Activities

Bulk Transactions (cont.)Bulk business as percent of MI industry’s new

insurance written12% for 2nd half, 200116% for 2002

MGIC, UGC, Radian and PMI bulk primary MI market leadersBulk primary MI in 2002

MGIC represents 25% UGC represents 19%

Source: Inside Mortgage Finance

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PMI Industry Update Activities

Government Sponsored Enterprises (GSE’s)Fannie Mae (formerly known as Federal National

Mortgage Association)Freddie Mac (formerly known as Federal Home

Loan Mortgage Corporation )

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PMI Industry Update Activities

GSE’s (cont.)Fannie Mae and Freddie Mac

Quasi-governmental agenciesPublicly owned corporationsRepresent roughly half of secondary mortgage

marketCompete against each other, as well as other

entities Enjoy implied governmental backing, so lower

borrowing ratesSource: Residential Mortgage Lending

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PMI Industry Update Activities

GSE’s (cont.)GSE Regulation

Office of Federal Housing Enterprise Oversight (OFHEO) regulates Fannie Mae and Freddie Mac

OFHEO established by Department of Housing and Urban Development (HUD) in 1992

Source: OFHEO website

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PMI Industry Update Activities

GSE’s (cont.)OFHEO’s mission - ensure the capital adequacy

and financial safety and soundness of Fannie Mae and Freddie MacFunded through assessments to Fannie Mae

and Freddie Mac, so not funded by taxpayers

Source: OFHEO website

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TaxesTax deductibility of PMI

Mortgage insurance premiums proposed to be tax-deductible from federal income taxes

Deduction to apply to homeowners whose adjusted gross income is $100,000 or less

Argument is MI premium should be tax deductible because lenders, not homeowners, benefit from MI

Source: Inside Mortgage Finance

PMI Industry UpdateRegulatory

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Taxes (cont.)Tax deductibility of PMI (cont.)

Expected to allow “some 300,000 families, who now rent, to qualify for a mortgage” (American Homeowners Association)

Predicted tax savings up to $700 on $135,000 loan (Milwaukee Journal Sentinel)

MI industry in favor to “help level the playing field for private mortgage insurers against 80-10-10 loans” (Inside Mortgage Finance)

PMI Industry UpdateRegulatory

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Taxes (cont.)Tax deductibility of PMI (cont.)

Bi-partisan provision introduced March 2003, but cut by President Bush in final version of tax bill in June 2003

PMI Industry UpdateRegulatory

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RESPA ReformRESPA – Real Estate Settlement Procedures Act

(current version since 1992)Purpose: To inform borrowers of the costs

associated with their loan and loan closingRequires lender to provide borrower with

good faith estimate of the settlement costsProhibits kickbacks and unearned feesReason for some disclosure documents

received during loan closing processSource: Residential Mortgage Lending

PMI Industry UpdateRegulatory

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RESPA Reform (cont.)RESPA reform proposed

Provides safe haven from anti-kickback and unearned fees provision for Guaranteed Mortgage Packages (GMP) Packaging could save consumers in closing

costs Imposes tolerance levels in good-faith

estimatesStipulates lender-paid mortgage broker

compensation as credit to borrowerSource: Mortgage Banking, February 2003

PMI Industry UpdateRegulatory

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GSE ReformTreasury and HUD want Treasury to assume

from HUD regulatory role of GSE’sHUD interested in maintaining authority of

establishing affordable housing goals

PMI Industry UpdateRegulatory

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GSE Reform (cont.)OFHEO too small to effectively oversee actions

of GSE’sFreddie Mac underreported earnings by $4.5

billion over 3 yearsFannie Mae committed “computational error”

of over $1 billionGSE’s have looser disclosure standards than

other publicly traded firms

PMI Industry UpdateRegulatory

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GSE Reform (cont.)Parties for reform (i.e., lenders, banks)

Lower borrowing costs (implied government backing)

GSE’s enjoy too many benefits not permitted to competitors (Over $2 billion emergency crisis line of credit)

Operating leverage too high, could compromise economy if default (less stringent risk-based capital standards)

PMI Industry UpdateRegulatory

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GSE Reform (cont.)Parties against reform (i.e., GSE’s)

Provide savings to consumer in borrowing costs (according to Congressional Budget Office, 25 basis points)

Provide liquidity for securitization marketFinalization of reform not expected before year-

end

PMI Industry UpdateRegulatory

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PMI Industry UpdateClosing Remarks

Large political involvement Industry constantly evolving

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Private Mortgage Insurance

Q&A