We have a public option for mortgage insurance-- it's called FHA mortgage insurance. The public option is fully funded by premiums paid by borrowers, not by the taxpayer. The public option exists alongside a private mortgage insurance industry, with several major private competitors-- Radian, PMI Group, MGIC and a handful of others.
Today, the largest of those mortgage insurers, MGIC, announced that it was cutting rates for a "substantial majority" of its customers, and why? Not because of competition from its private competitors but because of competition from the "public option":
MGIC cuts premium rates to fight competition from FHA
MGIC Investment Corp, the largest U.S. mortgage insurer, lowered its premium rates in an effort to fight loss of market share to the Federal Housing Administration (FHA).
Notice that it is specifically competition from the public option and not its private competitors that is causing MGIC to cut rates.
In its 8k filing with the SEC, MGIC explained its move in more detail:
For flow business, we and other private mortgage insurers compete directly with federal and state governmental and quasi-governmental agencies, principally the Federal Housing Administration ("FHA") and, to a lesser degree, the Veterans Administration. These agencies sponsor government-backed mortgage insurance programs, which during 2009 and 2008 accounted for approximately 84.6% and 60.4%, respectively, of the total low down payment residential mortgages which were subject to governmental or private mortgage insurance. This increase in market share includes loans that are eligible for insurance under our current underwriting guidelines. We believe the FHA, which until 2008 was not viewed by us as a significant competitor, accounted for the overwhelming majority of this increase in both 2008 and 2009.
Historically, the published premium rates charged by the Company’s principal subsidiary, Mortgage Guaranty Insurance Corporation ("MGIC"), for its flow new insurance written varied principally based on risk characteristics such as the loan to value ratio of the loan, loan purpose and loan instrument (i.e., fixed rate, adjustable rate) and not credit scores. Currently, the FHA does not take credit scores into account when pricing its insurance for loans that are eligible for insurance under our current underwriting guidelines. However, certain of MGIC’s competitors do take credit scores into account when pricing their insurance. Effective January 1, 2010, Fannie Mae implemented a program under which it would accept charter level mortgage insurance coverage, with the effect that for borrowers with credit scores of 720 and greater, under charter level coverage, we believe the monthly payment on a loan with such coverage would be lower than for a loan with standard mortgage insurance under our existing premium rates.
Subject to regulatory approval, effective May 1, 2010, MGIC will price its new insurance written after considering, among other things, the borrower’s credit score. MGIC’s pricing changes create three new tiers of pricing for full documentation loans for which the applicable borrower has a credit score of 620 or higher. The three new tiers will predominantly result in,
- lower rates for borrowers with credit scores of 720 and greater,
- higher rates for borrowers with credit scores between 620 – 679, and
- no change in rates for borrowers with credit scores between 680 – 719.
Had these rate changes been in place with respect to new insurance written in the second half of 2009 and year to date 2010, the rate changes would have resulted in lower premiums being charged by MGIC for a substantial majority of such new insurance written.
Given the premium rate increases previously announced by the FHA, which will be effective in the near future, MGIC intends that these price changes will position it to be price competitive with the FHA for loans to borrowers with credit scores of 720 and greater. However, there may be advantages to lenders to insure loans through the FHA, including higher servicing fees than on conventional loans. The statement in the second preceding sentence is a "forward-looking statement" and the sentence after such forward-looking statement is intended to provide a meaningful cautionary statement identifying an important factor that could cause actual results to differ materially from those in the forward-looking statement.
There are several things to consider here.
- The reason why the public option was not considered a primary competitor in the marketplace before 2008 is because the private mortgage insurers were insuring zero down payment and/or exotic mortgages that FHA was statutorily prohibited from insuring. Now that there is a more level playing field, the public option is a much more effective competitor in the marketplace.
- Notice that the price change is not all good news-- rates are raised for borrowers with low credit scores. In the health care market, the analogue of a credit score would be the health of the patient. In effect, the rates of the "sick patients" are being raised by the private insurer. I think that folks are pretty aware of the potential for private insurers "cherry picking" and that it has been accounted for in health care legistlation, but here we have a prime example of it.
- FHA recently raised its rates and tightened its underwriting standards. A public option is not immune to the market and at the end of the day, it has to take in enough premiums to pay out all claims. (housing is cyclical, however, and the reasons that premiums are being raised now has to do with effects of a boom and bust cycle in housing that is not present in health care).