- Phillip Bracken
Reducing Reliance on the Government Backstop
Updated: Apr 27, 2021
Today, private mortgage insurance (MI) has been used by mortgage lenders of all sizes to mitigate the negative consequences of borrowers defaulting on their mortgages. MI is the primary driver in incentivizing mortgage lenders to lend money to consumers who have less than a 20% down payment. The MI industry paid out more than $50 billion in claims during the foreclosure crisis and weathered the storm of the wave-upon-wave of defaults. It was $50 billion that taxpayers did NOT have to pay. In nearly every measurable way, MI performed better than Fannie Mae and Freddie Mac and with fewer resources. As a result, AHA believes the MI industry should be permitted to shoulder more of the burden than it does today. It is ready, willing and able if only Fannie Mae and Freddie Mac would accept lower risk on loans by using more MI. The way to accomplish this is through the implementation of a concept known as "Deeper Cover" MI which would cover about half of the value of a mortgage loan by insulating the mortgage lender, Fannie Mae and Freddie Mac from the first 50% of loss if the borrower defaults and the home is sold for less than is owned. One study suggests that borrowers costs would be lowered if the private mortgage insurance industry assumed this risk rather than Fannie Mae and Freddie Mac.