Sixty Years of Private Mortgage Insurance in the United States

H O U S I N G F I N A N C E P O L IC Y C E N T E R R E S E A R C H R E P O R T Sixty Years of Private Mortgage Insurance in the United States Laurie Goodman Karan Kaul August 2017 A B O U T T H E U R B A N I N S TI T U T E The nonprofit Urban Institute is dedicated to elevating the debate on social and economic policy. For nearly five decades, Urban scholars have conducted research and offered evidence-based solutions that improve lives and strengthen communities across a rapidly urbanizing world. Their objective research helps expand opportunities for all, reduce hardship among the most vulnerable, and strengthen the effectiveness of the public sector. Copyright © August 2017. Urban Institute. Permission is granted for reproduction of this file, with attribution to the Urban Institute. Cover photo via Shutterstock. Contents Acknowledgments iv Executive Summary v Sixty Years of Private Mortgage Insurance 1 Origin and Evolution of Private Mortgage Insurance 2 The Current Mortgage Insurance Market 8 Who Does the Private Mortgage Insurance Market Serve? 13 Importance of Private Mortgage Insurance to the GSEs 17 The Future of the Private Mortgage Insurance Industry 26 Conclusion 33 Notes 35 References 38 About the Authors 40 Statement of Independence 41 IV A C K N O W L E D G M E N T S Acknowledgments The Housing Finance Policy Center (HFPC) was launched with generous support at the leadership level from the Citi Foundation and John D. and Catherine T. MacArthur Foundation. Additional support was provided by The Ford Foundation and The Open Society Foundations. Ongoing support for HFPC is also provided by the Housing Finance Innovation Forum, a group of organizations and individuals that support high-quality independent research that informs evidence-based policy development. Funds raised through the Forum provide flexible resources, allowing HFPC to anticipate and respond to emerging policy issues with timely analysis. This funding supports HFPC’s research, outreach and engagement, and general operating activities. This report was funded by US Mortgage Insurers (USMI), a trade association representing private mortgage insurers doing business in the United States. Although USMI was given an opportunity to review a draft of this publication, the Urban Institute was under no obligation to incorporate any feedback. Additionally, the Urban Institute at all times had full control of the methodology, analysis, insights, and recommendations of this report. We are grateful to USMI and to all our funders, who make it possible for Urban to advance its mission. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. Funders do not determine research findings or the insights and recommendations of Urban experts. Further information on the Urban Institute’s funding principles is available at www.urban.org/support. This report was reviewed with significant comment by John Weicher of the Hudson Institute, an independent research organization. We are grateful to Weicher for his thoughtful contributions to the final product. E X E C U T I V E S U M M A R Y V Executive Summary The Modern Private Mortgage Insurance Industry 2017 marks the 60th anniversary of the birth of the modern private mortgage insurance (PMI) industry. Although the industry’s roots go back to the pre-Depression era, it has existed in its current form since 1957, when Mortgage Guaranty Insurance Corporation (MGIC), the first PMI firm, was founded. Its creation was motivated by the desire of its founder, Max Karl, to give lenders an alternative to Federal Housing Administration (FHA) lending. Although the FHA had served the mortgage market for more than 20 years, its underwriting restrictions and bureaucratic processes had made obtaining FHA insurance time consuming and inefficient, forcing lenders to look for alternatives. Mortgage Guaranty Insurance Corporation was so successful that the PMI market soon attracted new entrants and the industry flourished. Private mortgage insurance ballooned from $0.3 billion in 1960 to $63 billion by the late 1970s. Although government-backed mortgage insurance through the FHA and the US Department of Veterans Affairs (VA) was still the largest player, PMI’s success introduced competition and ended the government’s monopoly. This competitive dynamic between private and government insurance programs exists today and influences borrower decisions while shopping for a mortgage. The PMI industry has continued growing in recent decades and has made it possible for millions of households to become homeowners. But the industry’s growth did not follow a straight trajectory. Periods of sustained growth were often followed by episodes of industry-wide stress and subsequent rebuilding, including during the last housing crisis. Throughout this history, private and government insurance have played complementary roles. Pr