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 and Freddie. 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. If they understood the issue the 'people' would object. If Mr. Lockhart and Mr. Geithner believe that they have to sustain AIG's role as an 'accepted provider' of PMI to the Agencies they should explain their rational. I for one would like to hear it.
Bruce, I am but a lowly soccer mom trying to put all of this together and post about it on my soccer mom blog. The biggest problem I encounter is that most people feel they are incapable of understanding what is going on and give up before they've started.
ReplyDeleteThank you for keeping us abreast, even if you do keep me up at night.
I'm sure you've seen Sal Khan's Geithner II video on YouTube (showing how the investment banks will game Geithner's toxic asset buy-back program) but if you haven't, it's worth a watch and a post to your blog.
Bruce
ReplyDeleteThanks for another great post.
Your honesty and knowledge are refreshing. Very few are brave enough to speak the truth and fewer do so as clearly as you.
The moratorium on foreclosures are over and a new wave is just starting to come in:
ReplyDeletehttp://www.fieldcheckgroup.com/2009/04/11/4-10-forward-look-at-defaults-foreclosures-banks-and-housing/
Bravissimo...Your own blog! Your latest post... an interesting as well as informative commentary. Who knew you could write through all that chicken scratch!
ReplyDeleteCan't say I've noticed less "stuff" on my grocery shelves over the last several months but rather a marked spike in grocery prices... Can only sadly imagine how those on fixed incomes are handling such outrageous and unprecedented price hikes!
Lois G.
P.S. Interests... except Christmas!
The MI firms are not the culprits in the current problem. They functioned successfully for years providing people without savings access to housing profitably. What changed was the government/Clinton housing tinkering, lowering the bar for who qualified for loans and telling banks Fannie/Freddie that they had to provide them. This sudden increase in demand inflated housing prices artificially. The whole house of cards tumbled when the defaults started and housing prices dropped. Add to this whole scenario banks making piggy back loans, and then selling off the risk as bundled investments and there is a recipe for fraud, because the selling agent no longer pays the penalty for a risky loan, the investor does. MI has a place, some people without funds for down payments deserve a chance, but not everyone. Instead of blaming MI firms entirely, look to Maxine Waters, Barney Frank, and others who said in 2004 that everything was find with Fannie and Freddie and blocked attempts to regulate. Check youtube for their comments. Or, you could blame the current members of our government who are again pushing for loans to unqualified people. Everyone does not deserve or have a right to own a house.
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