Insurance Claims And Issues

Lenders and Insurance: Tied Together.

    There are those that wonder what Insurance has to do with Banks and Foreclosures and the continuing bad Market Conditions.   Many banks and other lenders took back risky mortgages as collateral.  The mortgages are now increasingly in default, and even people who were formerly "good" credit risks are being foreclosed.  When lenders write down the value of their mortgage collateral, it is not really a mystery that the action is adverse even to themselves.  "The losses at Merrill [Lynch] were widely expected, in part because the bank has exposure to mortgage reinsurance companies like MBIA that have seen their credit ratings drop."  Louise Story, "Merrill Reports $4.9 Billion Loss on Write-Downs" (New York Times Online, dated Friday, July 18, 2008).  [Emphasis added.]

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Mortgage Insurance Claims Anticipated to Raise the Roof.

     The amazing fall from grace and profitability of Mortgage Insurance Companies is detailed in this report using information reported by Fitch Ratings:  Josh P. Hamilton, "Record Mortgage Insurer Claims Haven't Reached Peak, Fitch Says" (Bloomberg.com, Wed., July 16, 2008).

     Once the two largest Mortgage Insurance Companies, MGIC of Milwaukee, Wisconsin and PMI of Walnut Creek, California, have fallen very far.  MGIC reportedly declined more than 75% in this year alone, while PMI reportedly has declined 86% as well in 2008.  Their troubles are the consequence of "record claims" apparently because 70% of all the Mortgage Insurance Policies now in existence were issued to provide Coverage for loans from 2005 through 2007, a particularly troubling period for defaults on home loans.  "Mortgage insurers pay lenders when borrowers default and foreclosure fails to recoup costs."

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FHA Waives Waiting Period, Offers Mortgage Insurance on Foreclosed Homes.

     The Federal Housing Administration is modeling parts of a new law that previously passed the House of Representatives and is apparently awaiting action in the Senate.  The FHA reportedly adopted a narrowly focused new policy to last one year.  Under the new, temporary and narrowly focused policy, the FHA will waive its established 90-day waiting period for new ownership of a home.  This means that the FHA will offer immediate Mortgage Insurance to buyers of homes that have been foreclosed.  See Alison Vekshin, "U.S. Lifts Limits on Insurance for Foreclosed Homes (Update 1)" (Bloomberg.com, Friday, June 13, 2008).

     The housing bill that passed the House and is awaiting action by the Senate contains many other provisions besides the particular provision affecting the FHA waiting period.  Vikas Bajaj, "As Bill Evolves, Default Rate is Snowballing" p. 1, col. 1 (New York Times Nat'l Ed., Sunday, June 29, 2008, published online as "As Housing Bill Evolves, Crisis Grows Deeper").  83 Senators recorded their support for the entire housing bill, including of course the provisions that would affect the FHA.  It is apparently one of the few bills on which the Senate successfully voted to end a filibuster apparently only by Republican Senators.

     After that, however, one Senator, also a Republican, insisted that an amendment be added to the housing bill that would extend credits for renewable energy.  The amendment, still pending at the time of this post, is co-sponsored by a Democrat.  However, she is not reportedly insisting on halting the housing bill.  The House previously rejected the same amendment several times as it passed the housing bill and sent it to the Senate.  In the face of amendment insistence from the one Senator, the Senate adjourned for its Fourth of July recess without taking up the housing bill.  Lori Montgomery & Jeffrey H. Birnbaum, "Political Maneuvers Delay Bill After Bill in Senate" (Washington Post Online, Saturday, June 28, 2008).

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Different Business, Different CatClaim Preparations.

     Different businesses get ready for Catastrophe Claims in different ways, it is reported in "Getting Ready for Storms is Major Job For Big Businesses" p. C1, col. 5 "Central Florida Business" Section (Orlando Sentinel, Friday, June 13, 2008), published online as "Past Storms Taught Lessons Big Businesses Won't Forget".

     Something these businesses all have in common with each other, and with every individual as well:  Finding and keeping Insurance Coverage for Catastrophe Claims in the near future now, and in future days far ahead.

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Insurance and Foreclosure.

     The rising tide of foreclosures carries with it many consequences.  One of the unfortunate effects is the likely falsehood that homeowners are abandoning their homes.  It appears that speculators are abandoning houses that were vacant when they got them.

     There is a new industry in the wake of the foreclosure tide, called "the home inspection business" in this report which focuses on vacant properties in North Florida: Vikas Bajaj, "Foreclosure's Residue /Contractors Are Kept Busy Maintaining Abandoned Homes" p. C1, col. 2 (The New York Times Nat'l Ed., Tuesday, May 27, 2008), available online at www.nytimes.com.  The business consists of contractors who inspect abandoned homes for mortgage companies.

     While the thrust of the article assumes that homeowners are abandoning their homes in the face of foreclosure, recounting some predictions that millions of homeowners face foreclosure in the next couple of years, one of the examples given is of a house left "vacant for several years", which would put it at at time before the subprime crisis and foreclosure fears began, and instead would place the example of that house squarely in the middle of what once-upon-a-time was called the 'housing boom'.

     Insurance companies can often deny claims on the ground that a home once occupied is left vacant for a certain period of time before a claimed loss.  It is uncertain, but it is a good bet that there has not been any particular rise in such claims or in such denials.

     Rather, an area of inquiry if you will is the number of claims by Mortgage Companies on damage to vacant property for which they issued mortgages knowing the property to be vacant at that time, and the number of denials of such claims by their Insurance Companies.  That would offer a better glimpse into the foreclosure crisis.

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Credit Raters Examined!

      Many specifics and lots of broad implications about the workings of credit rating corporations including their roles in Insurance are discussed in Roger Lowenstein, "Triple-A Failure," p. 36 (New York Times Sunday Magazine, April 27, 2008).  One thing is hardly mentioned but fairly clear:   While the credit rating corporations recognize that their models of evaluating subprime mortgages and collateralized debt obligations were inadequate if not counterproductive by providing a rating structure on paper or in theory, but not in reality, it does not appear that any of the credit rating companies ever declined even one opportunity to be paid large amounts of money to rate the credit of even one "asset-backed" financial product including Insurance.  Not one.

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Excess, Credit Conditions, and Insurance.

    "Like at the end of the Gilded Age and the Roaring Twenties, we are going the other way.  We are clearly in a period of excess, and we have to swing back to the middle or the center cannot hold."

William H. Gross, chief investor at a bond fund, quoted  by Jenny Anderson, "Wall Street Winners Hit a New Jackpot:  Billion-Dollar Paydays" p. A1, col. 3 (New York Times Nat'l Ed., Wed., April 16, 2008). 

    Credit conditions affect the purchase of Insurance and the regulation of Premium Increases.  Current reports concerning the availability and use of credit reflect:

• The Mortgage Bankers Association began tallying foreclosure actions in 1979.  The current number of foreclosures in the United States is the highest that the Mortgage Bankers Association has ever reported.
• Almost every State in the Union has experienced the effects of an increase in the number of foreclosure proceedings.  In 47 States, foreclosure totals increased by 20% or more in one year's time, from December of 2006 to December, 2007.
• In the State of Ohio for example, in 2007 over 80,000 foreclosure lawsuits were filed.  That is an increase of 40% from only four years ago.

    Yet States are taking steps to face the credit crisis from which the current Federal government always seems to flee.  Taking Ohio as an example again, the Ohio Supreme Court approved a new Mediation program in January, 2008.  When a lender files a foreclosure action in Ohio, the lender is allowed to obtain copies of the real estate closing documents only after the lender first tries "to work out payments with homeowners."  In other words, they have to mediate their dispute with the borrowers they are suing in the foreclosure action.  "'It slows down the process and gets everyone to the table,'" says the Ohio Treasurer.  Dina ElBoghdady & Renae Merle, "States Tackle Foreclosures in Absence of Federal Help" (washingtonpost.com, Wed., April 16, 2008).  This newspaper report is based on a study prepared by the Pew Charitable Trusts, as was this one:  John Leland, "Foreclosures Push States to Try a Mix of Solutions" p. A14, col. 6 (New York Times Nat'l Ed., Wed., April 16, 2008).   

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Credit Crisis and Insurance, Part 2: Mortgages and Bonds.

         The Credit Crisis and Insurance, Continued:  Part 2.
   
    There have certainly been financial crises before.  The major thing that makes the current credit crisis different is that this one comes from an infection of the system.  The old tools used in the past by the U.S. Federal Reserve may actually hurt, rather than help, in fixing what is in reality a system-wide breakdown.   Tom Petruno, "This Big Rescue May be Just the Beginning" (Los Angeles Times Online, Saturday, March 15, 2008); Jenny Anderson & Vikas Bajaj, "News Analysis/A Wall St. Domino Theory" p. A1, col. 5 (New York Times Nat'l Ed., Saturday, March 15, 2008).  See generally Floyd Norris, "News Analysis/For Some Lenders the Risk is Too Great" [Published Online As: "F.D.R.'s Safety Net Gets a Big Stretch"], p. B1. col. 2 "Business Day" Section (New York Times Nat'l Ed., Saturday, March 15, 2008).

    This is because the current credit crisis is more analogous to a septic infection of the ways in which credit is bartered in the present-day market, if you will:

• Many lenders of money, i.e., so many extenders of credit like banks, brokerage firms and investors, extended credit by direct loans or by investing their money in real estate.  When subprime mortgages began to default, later joined by defaults on paying the ever-increasing interest rates due on adjustable rate mortgages -- foolishly agreed to even by home buyers who might have otherwise had good credit compared to the people who could get only subprime rates -- mortgage defaults soon became a problem that accordingly spread to many banks, many brokerage firms, and many investors, not just a few.

The increasing fear that fuels the prevailing credit crisis will almost certainly  lead to more  Claims on Mortgage Insurance Policies as homeowners increasingly default on their Mortgage payments.

• Since the credit crisis is fueled by fear that money lent will never be repaid, and thus that money borrowed cannot be repaid either, mortgage defaults and declining house prices have made investors fearful about all kinds of debt securities, including securities that have nothing to do with housing or mortgages.  If lenders cannot raise the capital to make loans because investors will not buy the securities that back such loans, then those are loans that may not be made.  For example, some banks are reluctant to make student loans even as part of a U.S. Government program:  "Investors have proved reluctant to buy securities backed by student debts, making it more difficult for lenders to raise the capital they need to make loans."   Jonathan D. Glater, "Student Aid Availability Questioned" p. A9, col. 6 (New York Times Nat'l Ed., Saturday, March 15, 2008).   
• As an example, demand has recently deteriorated big-time for Munis or Municipal Bonds.

Bond Insurance on Municipal Bonds may not even be necessary for most Government entities that have the authority to issue Bonds.  As was written in this space in many previous posts, these authorized government bodies generally do not default.  They repay their debts.  Corporations issuing Bonds are 100 times more likely to default on their bonds.  Yet, at a time when more corporations are likely to default on repaying their Bonds, then at least where Insured Corporate Bonds are involved, Claims can be anticipated on the Bond Insurance Policies that insure the repayment of such debts.

• Cf. Anderson & Bajaj, supra:    "Of particular concern [to hedge funds and other business partners of Bear Stearns] are the insurance contracts known as credit default swaps in which one party agrees to guarantee interest and principal payments in case an issuer defaults on its bonds."

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Credit Crisis and Insurance, Part 1: The Background.

Up the Republic!

    Insurance Policies at risk in the credit crisis potentially include Mortgage Insurance and Bond Insurance Policies.  Their role, and the role of Claims upon those Policies, requires a little background, what we lawyers like to call a "predicate".

• Three decades or so ago, the use and extension of credit in the United States began to change markedly.  Investors were hungry for more and different kinds of interest income.  Wall Street crafted more and more ways to change loans into interest-bearing bonds.
• Ultimately, the search for ever more ways to make loans required finding, or making, a larger pool of people to whom loans could be made.  The more and riskier the loans, the greater the chance of high rates of interest, if only the borrowers could repay.  That stressful search led to loans made to people who could not likely pay the money back, and their "collateral" was made from subprime mortgages.
• At this time, the credit market has collapsed.  To put it another way, the financial system in the United States is overleveraged, meaning there is just plain too much debt now for Wall Street to tolerate.  Many investors respond to this stress by not taking risks at all -- exactly the opposite behavior they indulged in starting nearly 3 decades ago.  Clearly, this is a big change in behavior, so big that currently, many investors do not wish to run the slightest risk of taking on any more debt.  Unless the debt is owed to them directly by the United States Treasury.  That is how the recent bailout of Bear Stearns, the investment bank, by J.P. Morgan, came about with the approval of the U.S. Federal Reserve.  "The troubles at Bear Sterns have come quickly and savagely and hurt some of the putatively smartest money in finance."  Landon Thomas, Jr., "Run on Big Wall St. Bank Spurs U.S.-Backed Rescue" p. A1, col. 5 (New York Times Nat'l Ed., Saturday, March 15, 2008).
• Tom Petruno, "This Big Rescue May Be Just the Beginning" (Los Angeles Times Online, Saturday, March 15, 2008).   See generally Jenny Anderson & Vikas Bajaj, "News Analysis/A Wall St. Domino Theory" p. A1, col. 5 (New York Times Nat''l Ed., Saturday, March 15, 2008). See also Landon Thomas, Jr., supra. 

    In the next post, the implications for debt insured by Mortgage Insurance and Bond Insurance.

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Happy St. Patrick's Day!

Mortgage Investors Have No Scratch, Mortgage Insurers Will Have Claims.

              "The core of the problem remains soaring home loan defaults."

Walter Hamilton & Tom Petruno, "Stocks Slide on Fears of Loan Defaults" (Los Angeles Times Online, Friday, March 7, 2008).

Note:  Have you noticed, too, that links to the Los Angeles Times Online require a lot of patience?  I do not always get through successfully on the first couple of tries, let alone the first try, do you?  Patience goes a long way in that regard, as it does elsewhere in life, I guess.

    Mortgage foreclosures have never been higher since the Mortgage Bankers  Association began keeping records 30 years ago.  In fact, for almost 30 years, the foreclosure rate was never larger than 7%.  That changed in 2007.  In 3Q2007, the percentage of mortgages in foreclosure or past due increased to 7.3%.  At the end of the 4Q2007, the percentage of mortgages in arrears or in foreclosure climbed to 7.9% of all mortgages held by all borrowers across the United States.  Vikas Bajaj, "As Foreclosures Rise, Investors Pull Back" (New York Times Online, Friday, March 7, 2008).

    The current surge in foreclosures began with subprime mortgages, which are generally made to home buyers who have low incomes or poor credit.  However, the Mortgage Bankers Association's current survey evidences  delinquencies and foreclosures for  prime  mortgages  too.  The effects are felt across the United States.  California, Florida, Arizona and Nevada are the States reporting by far the biggest chunk of foreclosures.

    These are the currently reported percentages nationally of borrowers who are either significantly behind in their payments or in foreclosure:

•                4.51% of the borrowers holding prime mortgages.
•                8.68% of those with adjustable rate mortgages.
•              28.61% of all Subprime loans.
•              35.15% of adjustable subprime mortgages.

    For the first time since the Federal Reserve began keeping records over 60 years ago, Homeowners in the United States owed more money on their houses than they had equity in them.  Maura Reynolds, "Foreclosure Rate Hits Record High" (Los Angeles Times Online, Friday, March 7, 2008).

    Carlyle Capital and Thornburg Mortgage, two of the larger mortgage investors, could not meet "margin calls--requests from lenders for extra capital to make up for the declining value of their holdings" on Thursday, March 6, 2008.  Hamilton & Petruno, supra.

    All these developments are factors in a major "tumble" (read:  crash) in stock prices.  It is a virtual certainty that these same developments will lead and are leading now, to a surge in claims on Mortgage Insurance Policies as well.

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