Mortgage Insurance & Credit Risk

Transcription

1 Mortgage Insurance & Credit Risk May 31, Genworth Financial, Inc. All rights reserved.

2 Well-Regulated and Well-Capitalized MI Helps First Time Home Buyers Get Into Homes Earlier Down payment often is the greatest obstacle for first time home buyers. First time home buyers clear inventory and create new demand. Protects Banks, Borrower, and Financial System Well-regulated MI protects against default risk reduces severity and frequency. Creates a counter cyclical capital buffer as MI companies naturally increase regulatory capital through the upside and disgorge capital on the downside of an economic cycle. Prudently continue to originate during stressed markets. Incentivized to avoid foreclosure and help home owners cure delinquency. Supports Strong Underwriting Discipline Mortgage insurers take the first loss from banks. Clear interest in sustainable lending. Second set of eyes. Most effective when they are auditors with capital at risk. Source of Feedback for Regulators and Market 2

3 Mandatory LTV Based MI : Rationale MI provides counter cyclical capital support, with prudent underwriting, for the higher risk High LTV mortgage market. Critically, making MI mandatory avoids the risk of adverse selection or capital arbitrage, ensuring the model for counter cyclical loss mitigation functions as intended. Mandatory MI creates a comprehensive, and therefore more efficient, risk pool. It also eliminates pressure to under price or imprudently loosen underwriting. Diversifies risk geographically and across lenders. Can work in concert with LTV limits or caps to prevent financial engineering to prudently maintain the first time homebuyer market while limiting speculation. Selected Examples: Canada, Hong Kong, South Korea 3

4 Strong Capital Incentive : Rationale Capital relief for mortgage holder on loans with MI incents lenders to transfer risk to a well-regulated and well-capitalized 3 rd party specialist in a first-loss position. Strong capital incentives work best when the banks properly recognize and account for the credit default risk on their books. Keeps the capital in regulated financial services companies. Selected Examples: Mexico, Australia, Canada, India, Italy, South Korea 4

5 Maintain Supportive Regulatory Environment Prevent Rebates, Commissions And Inducements These practices weaken a lender s incentive to purchase at the best possible terms for borrower. Such practices could result in inadequate pricing for insurer, thereby weakening financial wherewithal and ability to sustain long term viability in market. Limit Related Party Transactions Such As Bank Owned Monoline MIs No true third party assessment of risk. No true third party transfer of risk does not protect lending industry in stress scenario. Often leads to adverse selection for true third party MI. Regulating and policing capitalization and business conduct is difficult and burdensome. Investment Criteria On Capital Limits on correlated risks, especially real estate. Selected Example: Canada and Mexico 5

6 Domestically Ringfence Regulatory Capital and Reserves In A Monoline Structure : Rationale Capital and reserves should be tailored to unique nature of MI risk highly specialized, cyclical and long tailed. Regulatory capital requirements includes minimum capital requirement, contingency reserves, case loss reserves, and unearned premium reserves. Regulatory capital builds in good markets and ensures claims paying even during prolonged down turns. Monoline with ringfenced capital held domestically: creates transparency for regulators and investors; segregates other lines from catastrophic credit default scenarios; and assures dedicated and specialized management. Monoline eliminates incentives to under price MI in order to cross sell other products or services. U.S. Selected Examples: Australia, Canada, India, Mexico, 6

7 Private MI Compliments Government Support for Mortgage Lending Direct Government Support for Housing Is Assumed Private MI in First Loss Position With Government Backstop or Guarantee Rationale: Private capital in first loss ensures market discipline for origination, underwriting and risk management. Government backstop creates investor confidence and liquid market. Government risk is remote only arises in true catastrophe. Explicit Government backstop means government can be compensated for its guarantee. Government backstop helps maintain liquidity and contain risk across housing cycles. If A Government MI Competes With the Private Market There should be a level playing field for all MIs on pricing, capital and reserving requirements and product oversight. Prudential regulators should have the same level of oversight of the Government MI as the Private MIs. The Government MI should be actuarially validated. 7

8 Private Mortgage Insurance U.S. Model MI Facilitates Purchase Of Homes With Less Than 20% Down - Modern MI Product Launched In 1950 s To Deliver Conventional Low Down Payment Financing Across the U.S. - Primary MI Borrower Is First Time and Moderate Income Homebuyers Mortgage Insurance Is Required By the GSEs - Fannie Mae / Freddie Mac - On Low Down Payment Loans To Cover Default Risk MI Offers Capital-Efficient Risk Transfer For Low Down Payment Loans Held In Portfolio or Securitized in Private Label Securities MIs Independent Underwriting Standards Impose Credit Risk Discipline Via a Second Set of Eyes MI Pays Mortgage Investor In Event Of Default By Borrower - Fannie / Freddie Are Primary Beneficiaries of MI Insured Loans - Since 2007, MIs have Paid $30B in Total Claims Including $25B to Fannie & Freddie MI Industry Has Always Been A Key Driver of Sustained Housing Recovery 8

9 US MI Industry Has Weathered the Storm Contingency and Loss Reserves Built Capital Buffer Industry Has Paid ~ $30B in Claims Since 2007 Over $7 Billion in Capital Raised by Existing MIs New Entrants Have Invested an Additional >$1B Home Prices at Bottom New Delinquencies Declining New Business Increasing New Business Rebuilding Capital Base 9

10 Private MI Losses & Capital Mortgage Insurance is Priced For Long Term Housing Cycles Countercyclical Model MIs Build Capital In Good Times to Pay Claims During Economic Downturns Current Downturn Is The Most Severe Ever Experienced Model Working Exactly As Designed Source: MICA Reports & Statutory Filings 1 Includes new entrant capital (Essent Guarantee) 10

11 Public Private Partnership Mexico Case - Genworth partnered with SHF back in 2005 SHF invited MIs to Invest in Mexico PMI, Genworth & United Interested SHF Learned From Global MIs Best Practices and Regulatory Musts Global MIs Learned from the Local Market Through SHF Data & Practices - Through Ministry of Finance SHF Helped Shape the Regulatory Market MI Recognized on Insurance Law Capital & Reserving Relief to Banks Using MI Monoline Requirement with Own Capital & Reserving Rules No Brokers, Commissions, Inducements Specialized MI Companies Created - SHF & Genworth Work Today As an MI Industry and Compete Under the Same Rules Level Playing Field 11

12 2012 Genworth Financial, Inc. All rights reserved.