Realty Check

Mortgage Insurers Won't Pay on Bad Loans

"[Mortgage insurers] claim rescission rates have shot up from a historic rate of around 7 percent to as much as 25 percent over the last few quarters." -- Moody's Resi Landscape


When I saw that, I thought, well here is the mortgage insurance industry, faced with an historic number of claims, trying to save itself at the cost of the big banks.

I mean, if you buy insurance for a product, and something bad happens to that product, then you should make a claim and get paid back by the insurer.

That's the definition of insurance.

But just like everything else in today's housing/mortgage market, nothing is as it should be.

Mortgage insurers are rescinding (denying) claims, claiming themselves that the loans were fraudulent and misrepresented to them.

"The broker dealers, Bear Stearns, Countrywide even ResCap that was part of GM at the time, they used underwriting standards that were a little bit looser than what we see with the normal conforming market," says Chris Whalen of Institutional Risk Analytics. "In those cases, the default rates are in double digits and there's a lot more claims for what we call rescission or really putting back the loan to the originator by the insurer and saying, 'Hey, this loan wasn't kosher, and I shouldn't have insured it in the first place.'"

It's not exactly news that poor mortgage underwriting was the hallmark of the housing boom, but then you have to ask: Where were the checks, the safeguards, at the mortgage insurers? Where was their underwriting?

"They have a responsibility," argues insurance recovery attorney Rhonda Orin. "The applicant submits an application and then the mortgage insurer, they're not lemmings, they're supposed to check it. It isn't a one way street that they had no recourse but to accept at face value every single thing in the application."

So the banks are now left holding the bag on these loans, which could be a bag upwards of ten billion dollars by Orin's own estimates.

Okay, so the banks were bad, but the insurers didn't do their homework, so who should pay?

Well here's the part that troubles me.

Orin claims the insurers aren't just crying foul on the underwriting, they're actually using rescission now as a business practice because they're looking at such huge payouts that when they're done there will be very little left for their shareholders.

"I found it described in earnings calls to investors, to give comfort to investors by mortgage insurers saying, 'No need to downgrade us, we have a policy in place to deal with all of the insurance gone bad, which is we're going to rescind it'" Orin tells me.

Well that's not exactly kosher either.

And hence the lawsuits.

Bank of America is suing insurer MGIC for unpaid claims, and insurer MBIA is suing the bank Credit Suisse for fraudulent misrepresentations about mortgage backed securities. In other words, the lawyers win.

I asked MGIC for a response, but they declined. I asked Bank of America to discuss, but they declined as well.

Questions?  Comments?