Apollo Financial Group Sees Positive Light in The Rise of Private Mortgage Insurance

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Private mortgage insurance rises; good news say financial experts

by Howard Rothstein

A report from Inside Mortgage Finance shows that private mortgage insurance companies ended the fourth quarter of 2012 with 35 percent of the mortgage insurance market. That is up from 26 percent in the first part of 2012.

The balance of the mortgage insurance was held by the Federal Housing Administration and the Department of Veterans Affairs.

“This is good news for the marketplace, homeowners and taxpayers,” said Ricky Brava, senior partner of Apollo Financial Group. Apollo specializes in distressed debt investments with an emphasis on mortgages. “It’s good news for the marketplace because mortgage insurance companies believe the housing crash is behind us. They see a chance to make a profit and they are moving forward.”

It is good for homeowners, he added, because they have more choices when buying mortgage insurance. Competition is good for the market and drives consumers’ prices down, he said.

“Without question, taxpayers benefit,” said Dean Anastos, CEO of Apollo Financial. “Taxpayers have no business subsidizing homeowners. The government should not be involved in private industry. The marketplace has repeatedly shown it can provide superior service at lower cost than the government anyway.”

Getting private insurers more involved in the mortgage insurance market is also gaining ground in Washington. The Bipartisan Housing Commission’s Policy Center released a 136-page report at the end of February that called for changing the role of government in the mortgage industry. The report is called Housing America’s Future: New Directions for National Policy. The whole report is available at http://bipartisanpolicy.org/library/report/housing-future .

FHA mortgage insurance was sharply criticized.

Among the report’s suggestions is scaling back federal mortgage insurance. “Except in the case of FHA-insured loans, in which the difficulty of serving the low-cost rental market justifies the government’s assumption of 100 percent of the credit risk, the private sector should charge for and take a predominant share of potential losses before any government catastrophic risk insurance is triggered,” the report states.

“The private insurance market is built to take losses. Insurance premiums are structured so the insuring company can make a profit and make payouts in the event of a loss,” Mr. Anastos said. “Private insurance functions perfectly well for homeowner insurance, life insurance, vehicle insurance and other coverages. It can and should do the same for mortgages.”

Mr. Anastos pointed out the private market supplies nearly all the insurance on construction loans. He said there’s no reason this can be done for mortgages too.

The Commission’s report also pointed out the government is not following its own law and regulations on mortgage insurance. “The most recent independent audit of FHA, however, contained troubling news: it estimated that at the time of the audit, FHA’s single-family mortgage insurance fund had a long-term shortfall of $16.3 billion, yielding a capital reserve ratio of negative 1.44 percent, far below the statutorily required ratio of 2 percent,” the Congressional report states.

Whether or not the FHA will need a “drawdown” - taxpayer dollars - to meet its shortfall and potential obligations remains to be seen. Considering the budget woes in Washington, where that money might come from also remains to be seen.

Mr. Anastos and Mr. Brava both pointed this FHA insurance shortfall, the sequester, the continuing failure of Congress to pass a federal budget and the growing deficit as more evidence that the federal government needs to scale back its activity in the housing market.

“It’s this simple. The government needs to get out of the mortgage insurance business. As the Commission’s report states ‘private credit enhancers either carry risk on their balance sheets, with appropriate offsetting capital, or transfer the risk to capital market participants.’ That’s the way insurance should operate,” Mr. Brava said. “Government cannot operate that way. The private credit market voluntarily accepts risk as part of the equation. When the government gets involved, taxpayers are forced into accepting risk. Government is about providing services, not taking risks with tax dollars.”

The Commission’s report agrees with that. It states: “Looking ahead, the government’s support for the housing finance system — whether through insurance at the loan level or guarantees in the secondary market for mortgage-backed securities—should be designed with taxpayer protection as a critical goal. “

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