Mortgage Insurance allows borrowers to purchase homes with less than 20% down by insuring the difference from the actual down payment and the 20% threshold. Mortgage Insurance is offered through the U.S. Federal Government or from private issuers. As of August 19, 2011 the number of private companies offering Mortgage Insurance policies decreased by one as PMI Mortgage Insurance Company was ordered to cease the creation of new coverage. While PMI still manages a large pool of previous policies, without the ability to write new business, the long-term survival of the company is in question.
According to a story by Reuters, Arizona placed the company under regulatory supervision. The Arizona Department of Insurance may choose to put the company under state court receivership for the rehabilitation or liquidation, which would cause $735 million in outstanding debts to be due immediately, a burden the company has said they cannot manage.
Essentially, the insurance that PMI wrote provided the company with a lucrative and promising revenue stream until the current economic recession. Due to the enormous number of foreclosures that went through the system, PMI had to pay out more than they could cover with new policies. As the foreclosures continued, they eroded the capital that the company had accummulated. Because they are required to hold a certain amount of money to cover potential losses, the state of Arizona stepped in when they saw the company would be unable to maintain the required level of reserves.
To illustrate the difference between a good market and a bad one, PMI Group (the parent company) has watched their stock price rise to $50/share in 2007 all the way down to just $0.17/share as of the writing of this blog post.
While other mortgage insurance companies exist and may be able to pick up the volume no longer covered by PMI, it remains to be seen if they, too, will be impacted by the run of foreclosures that have hit our country in the last few years.
To read the full Reuters article, please click here.