what is the future for lenders mortgage insurance?future landscape 6. what if? 1. historical reasons...
TRANSCRIPT
![Page 1: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/1.jpg)
What is the future for Lenders Mortgage Insurance?
Aaron Cutter & Susie Bowden
![Page 2: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/2.jpg)
Contents
1. Historical Reasons for LMI2. Recap of recent LMI experience3. LMI’s place in the sub-prime picture4. Australia v US Mortgage Market5. Future Landscape6. What if?
![Page 3: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/3.jpg)
1. Historical Reasons for LMI
• Capital• Risk Transfer• Product Innovation• Risk Selection
![Page 4: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/4.jpg)
Capital
• Support ADI return on capital– Reduce level of ADI capital– LMI providers (arguably) expect a lower return
than ADIs– LMI providers accept volatile returns
• Facilitate growth in smaller players and entry of non-bank lenders
![Page 5: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/5.jpg)
Risk Transfer - Diversification
• Removes volatility from lenders’ losses• Delinquency rates and losses different
by lender in the recent benign economic times
• Even in “recent” down-turns LMI providers help smooth losses
![Page 6: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/6.jpg)
Product Innovation
• Security for lenders• Global experience
![Page 7: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/7.jpg)
Risk Selection• Discouraging inappropriate lending• Providing outsourced expertise to lenders
– fraud detection models,– credit score – underwriting standards.
![Page 8: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/8.jpg)
2. Recap of Recent LMI Experience
• Australian Experience• US Experience
![Page 9: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/9.jpg)
Australia
• Recent LMI losses have been very low (til 2007)• Favourable national economic environment• But history shows losses can be large (80s and 90s)• Where to for 2008 and 09?
0%
20%
40%
60%
80%
100%
120%
91/9
2
92/9
3
93/9
4
94/9
5
95/9
6
96/9
797
/98
98/9
9
99/0
0
00/0
1
01/0
202
/03
03/0
4
04/0
5
05/0
6
06/0
7
07/0
8
Loss
Rat
io
0%
5%
10%
15%
20%
Econ
omic
Fac
tors
Loss Ratio House Price Appeciation
Unemployment Mortgage Rates
?
Source: APRA Statistics, ASB
![Page 10: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/10.jpg)
United States of America
• Up until 2006, stable experience• Then very unfavourable conditions producing loss ratios in the
hundreds
0%
50%
100%
150%
200%
250%
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Loss
Rat
io
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Eco
nom
ic F
acto
rs
Loss Ratio House Price Appeciation
Unemployment Mortgage Rates
Source: S&P, U.S. Bureau of Labour Statistics
![Page 11: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/11.jpg)
Big falls in US house prices
50
100
150
200
250
300
Jun-
91
Jun-
92
Jun-
93
Jun-
94
Jun-
95
Jun-
96
Jun-
97
Jun-
98
Jun-
99
Jun-
00
Jun-
01
Jun-
02
Jun-
03
Jun-
04
Jun-
05
Jun-
06
Jun-
07
Jun-
08
Hous
e P
rice
Appr
ecia
tion
(% p
.a.)
Miami USA
![Page 12: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/12.jpg)
“Small” falls in Aus house prices
50
100
150
200
250
300
Jun-
91
Jun-
92
Jun-
93
Jun-
94
Jun-
95
Jun-
96
Jun-
97
Jun-
98
Jun-
99
Jun-
00
Jun-
01
Jun-
02
Jun-
03
Jun-
04
Jun-
05
Jun-
06
Jun-
07
Jun-
08
Hou
se P
rice
Appr
ecia
tion
(% p
.a.)
Miami USA NSW Australia
![Page 13: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/13.jpg)
3. LMI’s Place in the Sub-Prime Crisis
• Traditional US lending structure• Traditional securitisation• Recent departure from tradition
![Page 14: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/14.jpg)
Traditional Lending Structure
RMBS1RMBS1 RMBS2RMBS2 RMBSnRMBSn
LenderLender InstitutionalInvestors
InstitutionalInvestors
CDO1CDO1 CDO2CDO2 CDOnCDOn
CDO2CDO2
Package
Invest
Invest
Borrow
MIMI GSEsGSEs
Wall StreetWall Street
Byp
ass
GS
Es
Insure
RMBS1RMBS1 RMBS2RMBS2 RMBSnRMBSn
LenderLender InstitutionalInvestors
InstitutionalInvestors
CDO1CDO1 CDO2CDO2 CDOnCDOn
CDO2CDO2
Package
Invest
Invest
Borrow
MIMI GSEsGSEs
Wall StreetWall Street
Byp
ass
GS
Es
Insure
RMBS1RMBS1 RMBS2RMBS2 RMBSnRMBSn
LenderLender InstitutionalInvestors
InstitutionalInvestors
CDO1CDO1 CDO2CDO2 CDOnCDOn
CDO2CDO2
Package
Invest
Invest
Borrow
MIMI GSEsGSEs
Wall StreetWall Street
Byp
ass
GS
Es
Insure
![Page 15: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/15.jpg)
Traditional Securitisation
RMBS1RMBS1 RMBS2RMBS2 RMBSnRMBSn
LenderLender InstitutionalInvestors
InstitutionalInvestors
CDO1CDO1 CDO2CDO2 CDOnCDOn
CDO2CDO2
Package
Invest
Invest
Borrow
MIMI GSEsGSEs
Wall StreetWall Street
Byp
ass
GS
Es
Insure
RMBS1RMBS1 RMBS2RMBS2 RMBSnRMBSn
LenderLender InstitutionalInvestors
InstitutionalInvestors
CDO1CDO1 CDO2CDO2 CDOnCDOn
CDO2CDO2
Package
Invest
Invest
Borrow
MIMI GSEsGSEs
Wall StreetWall Street
Byp
ass
GS
Es
Insure
RMBS1RMBS1 RMBS2RMBS2 RMBSnRMBSn
LenderLender InstitutionalInvestors
InstitutionalInvestors
CDO1CDO1 CDO2CDO2 CDOnCDOn
CDO2CDO2
Package
Invest
Invest
Borrow
MIMI GSEsGSEs
Wall StreetWall Street
Byp
ass
GS
Es
Insure
![Page 16: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/16.jpg)
Recent Departure from Tradition
RMBS1RMBS1 RMBS2RMBS2 RMBSnRMBSn
LenderLender InstitutionalInvestors
InstitutionalInvestors
CDO1CDO1 CDO2CDO2 CDOnCDOn
CDO2CDO2
Package
Invest
Invest
Borrow
MIMI GSEsGSEs
Wall StreetWall Street
Byp
ass
GS
Es
Insure
RMBS1RMBS1 RMBS2RMBS2 RMBSnRMBSn
LenderLender InstitutionalInvestors
InstitutionalInvestors
CDO1CDO1 CDO2CDO2 CDOnCDOn
CDO2CDO2
Package
Invest
Invest
Borrow
MIMI GSEsGSEs
Wall StreetWall Street
Byp
ass
GS
Es
Insure
RMBS1RMBS1 RMBS2RMBS2 RMBSnRMBSn
LenderLender InstitutionalInvestors
InstitutionalInvestors
CDO1CDO1 CDO2CDO2 CDOnCDOn
CDO2CDO2
Package
Invest
Invest
Borrow
MIMI GSEsGSEs
Wall StreetWall Street
Byp
ass
GS
Es
Insure
![Page 17: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/17.jpg)
4. Australia v US Mortgage Market
• Mortgage Products• Lending Practices• Property Markets
![Page 18: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/18.jpg)
Mortgage Products• US
– Increase in sub-prime loans (i.e. high risk of default)– ARMs with ‘teaser’ rates (3/27s or 2/28s)– Sub-prime loans grew “nearly ten-fold in nine years”– Negative amortisation loans
• Australia– Less than 1% non-conforming – ARMs with teaser rates not offered in Australia
![Page 19: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/19.jpg)
Lending practices• US
– ARM 2/28s offered to those less able to afford the repayments
– Serviceability calculated on an optimistic basis– Lenders by-passing LMI
• Australia– serviceability is generally calculated at a buffer over
benchmark interest rates• But
– Australian households are move leveraged – Some questionable underwriting has occurred
![Page 20: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/20.jpg)
Property Markets• US
– Property slumps have been geographically isolated– Now, the US has experienced a nationwide downturn– Mortgage products and practices led to speculative
bubble and its bursting in some states– auto-manufacturing sector in trouble at the same time
• Australia– Property slumps also have been geographically isolated– Recently, property market has remained reasonably
stable– Could a nationwide property downturn occur
![Page 21: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/21.jpg)
5. Future Landscape
• The Mortgage Market• LMI and Capital• Risk Selection and Product Innovation• Risk Transfer
![Page 22: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/22.jpg)
The Mortgage Market
• Consolidation of the LMI providers• Regional banks will be at a
disadvantage to the larger banks • Assistance with quality control and
intellectual support
![Page 23: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/23.jpg)
Capital
95.01 –100%
90.01 –95%
85.01 –90%
80.01 –85%
70.01 –80%
60.01 –70%
< 60.01% 0%
10%20%30%40%50%60%70%80%90%
100%
Cap
ital R
isk
Wei
ght
ADI Risk Weight – With LMI LMI Risk WeightADI Risk Weight – no LMI Basel I ADI plus LMI
• Capital previously main driver of LMI use
• Capital benefits are lower under Basel II for Standard Approach banks
• Capital position is complex for IRB banks
• Reasons for LMI may move toward true risk assessment and mitigation
Relative capital levels required by LVR
![Page 24: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/24.jpg)
Risk Selection & Product Innovation• LMI providers still facilitate market discipline• The majority of the LMI business can be
expected to be unchanged• LMI may become the quasi ‘gold stamp’ of
underlying business
![Page 25: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/25.jpg)
Risk Transfer - Diversification
0
100
200
300
400
500
600
700
800
A B C D E F G H I J K L M N O P Q R S T U V W X Y Total
Del
inqu
ency
rate
rela
tivity
Jun-07 Jun-08
Delinquency rate (3 months in arrears) for Australian lenders as at 30 June
2007 and 30 June 2008
0
250
500
750
1,000
1,250
1,500
A B C D E F G H I J K L M N O P Q R S T U V W X Y Total
Del
inqu
ency
rate
rela
tivity
30-Jun-07 30-Jun-08
Relative delinquency rate for US lenders as at 30 June 2007 and 30
June 2008 – Prime loans
• LMI does provide true insurance risk transfer • In very stressed environments the level of risk transfer is
arguably lower• Maximum benefit provided by global LMI
![Page 26: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/26.jpg)
6. What if?
0%
100%
200%
300%
400%
500%
600%
700%
800%
Sep-08
Dec-08
Mar-09
Jun-0
9Sep
-09Dec-0
9Mar-
10Ju
n-10
Sep-10
Dec-10
Mar-11
Jun-1
1Sep
-11Dec-1
1Mar-
12Ju
n-12
Sep-12
Dec-12
Mar-13
Jun-1
3
Future Claim Costs Relativity between “baseline” Australian losses and a US like scenario
• 7 times current level of losses = 200% loss ratio
![Page 27: What is the future for Lenders Mortgage Insurance?Future Landscape 6. What if? 1. Historical Reasons for LMI • Capital • Risk Transfer • Product Innovation • Risk Selection](https://reader030.vdocuments.mx/reader030/viewer/2022040621/5f3494e668d6af5edf3aa787/html5/thumbnails/27.jpg)
Where will it settle
• Market consolidation and Basel II may lead to a declining LMI industry
• However, risk selection/acceptance and transfer have significant value
• How these opposing forces finally settle will determine whether overall use of LMI becomes less or more…