THE BASICS OF MORTGAGE INSURANCE Deb Ferrante, New England Account Manager February 8, 2016 1
Introduction Part of Essent Group Ltd., a publicly traded holding company (NYSE:ESNT), Essent Guaranty is a mortgage insurer domiciled in Pennsylvania, licensed in all 50 states and the District of Colombia, and approved by Fannie Mae and Freddie Mac. Founded to serve the housing finance industry when the demands of a rapidly changing business climate called for mortgage insurance company focused on building strong risk management partnerships with the lender community. The provider of choice for many of the largest and most seasoned mortgage originators. With Leadership and Operations teams that have extensive experience in all areas of the mortgage finance industry. Your mortgage insurance partner. 2
What is Mortgage Insurance? Mortgage insurance ( MI ) provides protection to lenders and mortgage investors against loss in the event a borrower defaults on his/her mortgage loan. When a financial institution, like yours, lends money to a borrower to purchase a home, the borrower must make an investment of equity, i.e., a down payment. Depending upon the amount of the down payment, the lender may require MI to protect itself against the possibility that the borrower will not repay the loan. Analysis has consistently shown that lower down payments less equity correlate with higher default rates. MI is typically required when the down payment is less than 20% of the purchase price. 3
MI Providers Government Programs Federal Housing Administration (FHA) of the Department of Housing and Urban Development. Department of Veteran Affairs (VA) - Home Loan Guaranty Program. Mortgage Guaranty Insurance (MI) Private MI companies, like Essent, are licensed by state insurance departments. A variety of sources for mortgage insurance, both government and private, gives you options, and enables you to best serve interests of your customers and your institution. 4
Mortgage Insurance Terminology Coverage is the protection that the MI company provides when it insures a loan. The higher the coverage level, the lower the lender s loss exposure. Coverage is expressed as a percentage of the loan amount. Exposure is the risk that a lender takes when it makes or buys a loan. The lender/investor decides how much exposure it is willing to retain. Typically the higher the LTV, the lower the exposure the lender is willing to retain. Exposure is expressed as a percentage of the original value. On Essent s rate card, the standard coverages required on loans sold to Fannie Mae and Freddie Mac are highlighted. 5
How MI works An Illustrative Example 6
How to Find an MI Premium Rate and Calculate a Payment Monthly (and Deferred Monthly) BPMI 3 1 2 4 Find the Premium Rate: 1. Loan-to-Value 90% 2. Required Coverage 25% 3. Borrower s credit score 4. (FICO) 725 5. Premium Rate 0.44% Calculate the Payment: Loan Amount $100,000 X Premium Rate 0.44% Annual Premium $440 12 Months $36.67/month 7
Borrower-Paid Mortgage Insurance Borrower-Paid MI, also referred to as BPMI Available as non-refundable or refundable. Payment options: Paid by the borrower as part of their monthly mortgage payment. Paid annually, with the first full year being paid at closing and subsequent years collected in the borrower s monthly mortgage payment. Premiums are paid to the MI company annually. Paid in a single payment at closing and the single premium is paid to MI shortly after loan closing. Financed into the loan amount and the single premium is paid to MI shortly after loan closing. Split Premium options are also available. May be cancelled: At the request of the servicer at any time. Cancellation rules are set out in the Homeowners Protection Act of 1998. At the request of the borrower when the LTV based on the original value reaches 80%. Cancelled automatically when the LTV based on the original value reaches 78%. 8
BPMI Monthly Premium Most common Premium Option The servicer pays the MI premium monthly and the premium is typically included in the borrower s monthly mortgage payment. Generally available in two forms: Standard monthly Typically, two monthly premium payments are provided at closing: one to cover the period until the first loan payment and a second to place in escrow. Thereafter, the premiums are paid on a monthly basis. Deferred monthly The first premium payment is deferred until the first loan payment is made. This option reduces the cash needed at closing, without changing the insurance coverage provided and is the most commonly used form of monthly premium. 9
BPMI Single Premium A BPMI single premium may be paid in its entirety at closing. It may be financed into the base loan amount. Note that when the premium is financed, the borrower continues to pay interest on the financed premium for the life of the loan. It may be refundable or non-refundable. If the coverage is cancelled and a refundable single premium was used, the borrower would receive a one-time refund of part of the premium based on the length of time the MI coverage was in place. If the coverage is cancelled and a non-refundable single premium was used, the borrower would not receive a refund. A single premium often provides the lowest monthly payment of any MI option available to the borrower. 10
BPMI Annual Premium Annual premiums require an up-front payment and monthly renewals. The up-front or first year premium is paid at closing. The renewal premiums are collected along with the borrower s monthly mortgage payment and escrowed by the servicer until the annual renewal date when they are remitted to the MI company. Once the standard of the MI industry, annual premium plans are now used infrequently. 11
Lender-Paid Mortgage Insurance Lender-Paid MI, also referred to as LPMI Paid by the servicer to the mortgage insurer. Non-refundable only. May be monthly premiums or as a single premium paid at closing. Lender typically recoups cost of MI by increasing the interest rate paid by the borrower. LPMI is not cancellable during the loan term. Lender and Servicer have borrower disclosure requirements set out in the Homeowners Protection Act. 12
Split Premiums The best of both MI products: An Upfront Premium Ranging from 0.50% to 1.75% for the non-refundable option Or from 0.75% to 2.00% for a refundable option And A lower monthly MI premium paid via the borrower s monthly mortgage payment 13
BPMI vs. LPMI BPMI Monthly LPMI Is easy to explain to the borrower. Deferred Monthly premiums minimize closing costs. Has straightforward servicing. Is cancellable. Refundability is not an issue since the borrower is paying one month at a time. Readily accepted in the secondary market. May initially provide the lowest monthly mortgage payment option for the borrower. The lender may benefit from the interest rate margin. Is not cancellable. Is not refundable. May require manual servicing or special LPMI servicing modules. May limit potential investors. 14
Considerations When Choosing an MI Plan What is your borrower s most important financial consideration? Smallest down payment? Least funds for closing? Smallest monthly payment? How long does the borrower plan to be in the house? Review each of the MI options to determine the best fit for your borrower. 15
When a Loan Defaults Reporting defaults is the first step in the loss management process. Essent s Loss Management team is always available to assist you with default reporting. Typical MI loss mitigation options may include: Home retention options that allow the Borrower to remain in the home and avoid foreclosure. Property liquidation options that allow the Borrower to sell or otherwise convey the Property and avoid foreclosure. If, ultimately, the default cannot be cured, once title has been obtained, a Claim for Loss may be filed under your Essent Master Policy. 16
Three Options Available for Paying a Claim Percentage Option: Essent pays the product of the Claim Amount and the Coverage Percentage (i.e., 25%, 30%, etc). This is the most commonly exercised option. Acquisition Option: Essent pays the entire Claim Amount takes title and possession of the Property. Third-Party Sale Option: Essent pays the lesser of the Percentage Option or the Insured s Actual Loss 17
Calculating a Percentage Option Claim 18
The Essent Difference: Master Policy Essent s Master Policy is approved and available for use in all states nationwide. Meets the newest Fannie Mae minimum policy standards Clear timelines for request of claim support More generous claim elements (e.g., attorney fees, threshold for physical damage) We pay penalty interest if we pay late Essent offers a financed premium benefit endorsement to its first loss primary coverage 19
The Essent Difference: Clarity of Coverage Essent s coverage terms are uniquely transparent. Clarity of Coverage applies to every loan Essent insures, and will travel with the loan. Whether you sell a loan, purchase a correspondent loan or buy servicing rights the benefits of Clarity of Coverage stay with the loan. Loans with the Clarity of Coverage endorsement are eligible for sale to the GSEs. Essent believes that MI counterparties should engage in a higher degree of due diligence upfront, enabling identification and resolution of potential problems at an early stage to ensure that its certificates hold their intended value. When analyzing price vs. value, we believe that, while pricing must be competitive, the value of an insurance company comes in its ability and its willingness to pay claims. Essent s Clarity of Coverage will ensure that mortgage insurance is a viable and reliable option for your organization. 20
Thank You for Your Time Deb Ferrante Account Executive New England deb.ferrante@essent.us 21