Mortgage Industry Organization's Members Responsible for Good Portion of Default Losses

Includes: AIG, FMCC, FNMA
by: Bruce Krasting

Treasury Secretary Geithner recently said that he was going to be the new Sheriff when it comes to mortgage fraud. If Mr. Geithner is truly interested in addressing the malpractices of the mortgage industry he should first look very close to home. He is sitting on a conflict of interest with AIG (NYSE:AIG) and the Agencies that he has known about for a long time. It is costing the taxpayers billions.

MICA stands for Mortgage Insurance Companies of America. MICA is the industry spokesman for the players in a very troubled side of the mortgage industry. In February of 2009 MICA members had outstanding insurance guarantees on $950 billion of mortgages. Almost of all of those enhanced mortgages were sold to Fannie Mae and Freddie Mac. The mortgage insurance industry has played a substantial role in the over-leveraging of the housing industry that has now brought us to our knees.

The corporate players behind MICA as of 12/08 include:

-AIG-United Guarantee
-Mortgage Guaranty Insurance Corporation
-Genworth Mortgage Insurance Corporation
-PMI Mortgage Insurance Co.
-Republic Mortgage Insurance Company
-Radian Guarantee

Follows a quote from MICA’s brochure describing their activity:

Read ‘traditional lenders' to mean Fannie (FNM) and Freddie (FRE). The definition of a conforming loan for the Agencies calls for a minimum of a 20% down payment. PMI allows individuals to buy homes when they have little or no down payment. FNM and FRE report that MICA members have enhanced an average of 25% of their combined portfolios.

MICA is well aware that no money down loans creates bad borrowers. Their words:

Studies? Forget the studies. Look at the facts. Fannie Mae reported in December of 2008 that its “Seriously Delinquent” rate for ‘Conforming’ mortgages was at 1.4%, the rate for ‘Enhanced’ mortgages was at 6.42%. MICA enhanced mortgages have a default rate 5 Times that of conventional mortgages.

When a mortgage goes into default and the home is foreclosed on the result is a devaluation of all of the homes in the neighborhood. This phenomenon has been sweeping through areas of the country for the past year. Foreclosures have been accelerating the downward spiral in housing prices. MICA’s members are responsible for a portion of the decline.

MICA provides a report on the loss rate for its insured loans ():

2004 and 2005 were the ‘best of times' for the residential real estate market. During that period of time the industry was making money. But even during those years the loss rate was equal to 37% of the premium income. This has always been a high-risk business where high default rates are anticipated. In 2007 and 2008 the defaults on MICA mortgages exploded. The financial results crippled the industry, the housing market and the economy. It was a big factor in sending Fannie Mae and Freddie Mac into receivership.

AIG brags of a 13% market share in this industry. They lost $2.5 billion in 2008 writing PMI insurance. Their defaults and losses are mounting in the first quarter of 2009. The taxpayers are footing the bill for every penny of this. FNM and FRE are also suffering losses from the same AIG enhanced loans. The resulting foreclosures are continuing to push all real estate values lower.

What do our leaders in Washington think of MICA? They have been looking for ways to slow the default rates for nearly eighteen months now. One would have thought they would have looked to where most of the defaults are coming from. No such luck. FHFA Director Lockhart wrote to MICA recently. His words:

Vital role? Mr. Lockhart is suggesting that the business that got us into this mess is going to be our salvation. He is dead wrong. We have to stop creating more bad borrowers and more bad loans. We have to decrease the number of defaults and foreclosures. MICA is working against Mr. Lockhart in that effort.

Mr. Bernanke and Mr. Geithner are well aware of these facts. They know that part of the AIG TARP money was used to cover the PMI losses at AIG - United Guaranty. They know what the default rate is on the enhanced loans owned by the Agencies. They know that the default/foreclosure rate is killing the housing market and adding to the overall number of problem loans. They have both spoken on the urgent need for stronger lending standards. But, AIG and the other members of MICA still have a book of insured mortgages that total nearly $1 trillion. The majority of that is owned by the Agencies.

There is no justification for State owned entities like AIG, Fannie Mae or Freddie Mac to be involved with high risk mortgage lending. Mr. Lockhart, Mr. Bernanke and Mr. Geithner should confront this issue before AIG’s PMI results for the first quarter are released. Another big check has to be written. It is likely that AIG’s PMI losses will be a matter of Congressional inquiry at some time in the future. AIG’s continued involvement with MICA will be difficult to explain.