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Recent Study Shows Insurance Lowers Default Risk

A recent study demonstrates that low downpayment loans accompanied by mortgage insurance are less likely to go into default or foreclosure than loans with ""piggyback"" second mortgages, which has been the most prevalent alternative to the use of mortgage insurance for the past decade.
[IMAGE] The study, requested by ""Genworth Financial, Inc."":http://www.genworth.com/content/home.html and conducted by ""Promontory Financial Group,"":http://www.promontory.com/ observed almost 5.7 million mortgages originated between 2003 and 2007.

Promontory found that loans with low down payments and insurance fared much better than uninsured loans with piggyback mortgages.

Compared with insured, low downpayment mortgages, loans with piggyback second mortgages were almost 21 percent more likely to go into default over a six-year period, according to the study.

The study also found that serious delinquencies occurred 32 percent more often among loans with piggyback second mortgages than among insured, low downpayment loans.

Among loans that did become seriously delinquent, the study found that those with low down payments and insurance were 54 percent more likely to return to current status than piggyback second mortgage loans.

In addition, among insured loans, borrowers were 40 percent more likely to remain in their homes after becoming delinquent than borrowers who retained loans with simultaneous second mortgages.

When conducting the study, Promontory controlled for a variety of factors that would influence likelihood of default, including loan type, interest rates, and unemployment levels.

Citing the study, Genworth Financial, a Fortune 500 insurance company, appealed to regulators in a letter last week to revise the proposed qualified residential mortgage (QRM) definition.

Genworth proposed a QRM that would include loans with 5 percent downpayments and 45 percent debt-to-income ratios.


Genworth argued that the proposed 20 percent downpayment requirement and 10 percent alternative would not substantially decrease likelihoods of default and in fact would have negative impacts on the housing market.

According to Genworth, the proposed downpayment requirement would block creditworthy individuals from entering the housing market, thus prolonging the market slump.

""The regulators' QRM proposal ignores other factors to focus primarily on requiring a large down payment. Low down payment mortgages performed safely prior to, and during the current housing market crisis and should not now be subjected, unnecessarily, to the higher costs associated with risk retention,"" said Kevin Schneider, president of Genworth's U.S. Mortgage Insurance business.

Genworth suggests a QRM definition with a downpayment requirement of 20 percent or even 10 percent will push nearly all low downpayment loans into the hands of the ""Federal Housing Administration,"":http://www.fha.com/ or, for the foreseeable future, to the GSEs.

This would be contrary to the regulators' stated goal to increase private lending.

""The very narrow QRM definition proposed by federal regulators would unnecessarily place the costs of risk retention on the backs of creditworthy borrowers, instead of, as Congress intended, on the books of mortgage originators and securitizers who engage in the risky practices that caused the current housing crisis,"" Schneider said.

In its letter to regulators, Genworth also noted that 54 senators and more than 300 House members support a QRM definition that includes a low downpayment option accompanied by mortgage insurance.

""Original legislative language and subsequent comments from members of Congress make clear that QRMs are not intended to be riskless loans,"" Schneider said.

""They are meant to be loans that, when they predominate, will facilitate a strong, stable residential mortgage market driven by the origination and securitization of prudently underwritten, sustainable mortgage loans with traditional terms and features that perform well in any economic cycle,"" Schneider continued.

""The Promontory study proves that low down payment loans with mortgage insurance fulfill this role,"" he added.

Genworth, as a mortgage insurance provider, is willing to underwrite all of its loans, and it suggested the QRM rule require all mortgage insurers to underwrite their insured QRM loans.

About Author: Krista Franks Brock

Krista Franks Brock is a professional writer and editor who has covered the mortgage banking and default servicing sectors since 2011. Previously, she served as managing editor of DS News and Southern Distinction, a regional lifestyle publication. Her work has appeared in a variety of print and online publications, including Consumers Digest, Dallas Style and Design, DS News and DSNews.com, MReport and theMReport.com. She holds degrees in journalism and art from the University of Georgia.

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