Mortgage Insurance: Product and Pricing. Developing Residential Mortgage Finance and Housing Markets in Russia Dubna, Russia February 2004

Transcription

1 Mortgage Insurance: Product and Pricing Developing Residential Mortgage Finance and Housing Markets in Russia Dubna, Russia February 2004

2 Agenda AIG United Guaranty. Product structure and coverage. Pricing components. Mortgage insurance regulations. International example: Hong Kong.

3 AIG United Guaranty

4 AIG United Guaranty Formed in 1963; corporate offices in Greensboro, North Carolina. Wholly-owned subsidiary of AIG since Monoline provider of MI products and services. AAA-rated by Moody s, Standard & Poor s, and Fitch. Key statistics (in USD): Total assets $2.5 billion. Capital and surplus $2.0 billion. Insurance in force (total outstanding loans insured) $108 billion. New loans insured in 2002 $53 billion. Risk in force $23.5 billion (partial coverage).

5 Product Structure and Coverage

6 Product Structure Purchase price = 100,000 Customer Deposit 15% 15,000 85% Customer Risk Mortgage Insurer Coverage 20% 20,000 Mortgage Insurer Risk 65% Bank Financed (85% LTV) 65,000 Bank Risk

7 Mortgage Insurance Does Not Provide: Payment of the loan upon borrower s death (a form of life insurance). Payment protection insurance credit insurance that provides income support in the event of a borrower s unemployment or disability. Title insurance. Property insurance.

8 Risks Covered by Mortgage Insurance Risks covered by mortgage insurance generally include: Borrower inability to repay. Borrower unwillingness to repay. Market value loss on individual home. Real estate market risk. Local/regional economic recession. Mortgage instrument risk. Economic catastrophe.

9 Risks Not Covered by Mortgage Insurance Risks typically excluded by mortgage insurance: Failure to recover property after default. Failure to secure clear title to the property. Failure to complete proposed construction. Physical damage to the property. Fraud and material misrepresentation. Loan servicer failure to perform. Natural disaster. Environmental risk.

10 Pricing Components

11 Pricing Components-Risk Factors Historical mortgage performance data. Loan-to-value ratio. Borrower credit history and employment status. Loan type, purpose, terms, and size. Loan documentation. Occupancy type. Property type, location, and appraisal. Originator and servicer.

12 Additional Pricing Components Policy duration. Capital requirements. Underwriting expenses. Taxes. Geographic distribution and risk concentration.

13 Mortgage Insurance Regulations

14 Mortgage Insurance Regulations Insurance regulations to promote safety and soundness of the financial system. Banking regulations that provide an incentive to use mortgage insurance and prevent adverse selection.

15 Key Insurance Regulations Monoline. Minimum risk to capital ratio. Contingency reserve: for catastrophic risk. Unearned premium reserve. Loss reserves: due to notice of delinquent payment. Minimum AA rating. No commissions, rebates, or inducements for referral of mortgage insurance business. Management expertise: critical for new housing finance markets.

16 Key Banking Regulations Increased capital charges for high loan-to-value ratio (LTV) loans, unless coverage is provided by a qualified third-party mortgage insurer. LTV limits for prudent mortgage lending, unless mortgage insurance coverage is applied.

17 International Example: Hong Kong

18 International Example: Hong Kong Mortgage insurance introduced in early Expanded lending market from 70% to 90% LTV. Improved housing affordability. Lowered risk-based capital weighting for banks. Improved risk management standards. Strict insurer capital and rating requirements. More than 12,000 borrowers have used mortgage insurance to obtain home ownership. US $15 billion in annual mortgage loan originations.

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