Mortgage Insurance Products
NMIC's residential mortgage insurance products primarily provide first loss
protection on low down payment loans originated by residential mortgage lenders
and sold to the GSEs and, to a lesser extent, on low down payment loans held
by portfolio lenders.
The GSEs are the principal purchasers of the mortgages insured by MI companies,
primarily as a result of their governmental mandate to provide liquidity in
the secondary mortgage market. Freddie Mac's and Fannie Mae's federal charters
prohibit the GSEs from purchasing a low down payment loan without an authorized
form of credit enhancement, including insurance from a qualified MI company,
the mortgage seller's retention of at least a 10% participation in the loan
or the seller's agreement to repurchase or replace the loan in the event of
a default. Lenders who sell their loans to the GSEs must ensure that the MI
coverage they purchase from us meets the GSEs' requirements.
Primary Mortgage Insurance
Primary mortgage insurance provides mortgage default protection on individual
loans at specified coverage percentages. Primary insurance may be written on
(i) a flow basis, in which loans are insured as loan originations occur in individual,
loan-by-loan transactions, or (ii) an aggregated basis, in which each loan in
a portfolio of loans is individually insured in a single transaction, typically
after the loans have been originated. In general, our business as a whole is
not seasonal in nature; although, the overall new business opportunity of the
private MI market may be impacted by normal seasonal trends in originations
of low down-payment mortgages. We currently offer both types of primary mortgage
insurance products to our customers. In 2015, all of our new insurance written
(NIW) consisted of primary insurance, and we currently expect that most of the
insurance that we write in the future will continue to be primary.
Our maximum obligation to an insured with respect to a claim is generally determined
by multiplying the coverage percentage selected by the insured by the loss amount
on a defaulted loan. The loss amount on an insured loan includes unpaid loan
principal, delinquent interest and certain expenses associated with the default
and subsequent foreclosure or sale of the property, all as specified in our
master mortgage insurance policy (Master Policy). At the time of a claim, we
will typically pay the coverage percentage of the loss amount, but have the
option to (i) pay 100% of the loss amount and acquire title to the property,
or (ii) if the property is sold prior to settlement of the claim, pay the insured's
actual loss up to the maximum level of coverage. We expect that most of our
primary insurance will be written on first-lien mortgage loans secured by owner
occupied single-family homes, which are one-to-four family homes and condominiums.
To a lesser extent, we may also write primary insurance on first-lien mortgages
secured by non-owner occupied single-family homes, which are referred to in
the home mortgage lending industry as investor loans, and on vacation or second
homes.
IIF is the unpaid principal balance of insured loans. RIF is the product of
the coverage percentage multiplied by the unpaid principal balance. When a lender
purchases our mortgage insurance, it selects a specific coverage level for an
insured loan. For loans sold to the GSEs, the coverage percentage must comply
with the requirements established by the particular GSE to which the loan is
sold. For other loans, the lender makes the determination. We expect our risk
across all policies written to approximate 25% of primary IIF but will vary
on an individual loan basis between 6% and 35% coverage. In general, we structure
our premium rates so that they increase as the coverage percentage increases,
to account for relatively increased levels of risk that are present as the coverage
percentages increase. Higher coverage percentages generally result in greater
amounts paid per claim relative to policies with lower coverage percentages.
Depending on the requirements of the loan instrument and the lender, the premium
payments for primary MI coverage may either be paid by the borrower or the lender.
Premium payments borne by the borrower are referred to as borrower paid mortgage
insurance (BPMI). Premium payments made directly by the lender are referred
to as lender paid mortgage insurance (LPMI). The lender may structure the loan
transaction to recover LPMI premiums through an increase in the note rate on
the mortgage or higher origination fees. In general, premium received on LPMI
business is non-refundable. In either case, the payment of premium to us is
the responsibility of the insured (i.e., the lender) and not the borrower.
Our premium rates are based on rates and rating rules that we have filed with
various state insurance departments. To establish these rates, we use pricing
models that assess risk across a spectrum of variables, including coverage percentages,
loan-to-value (LTV) ratios, loan and property attributes, and borrower risk
characteristics. We generally cannot change premium rates after coverage is
established. We have discretion under our rates and rating rules to offer discounts,
and we may choose to offer such discounts for certain high quality business.
In general, premiums are calculated as basis points of the unpaid principal
balance of an insured loan. We have four premium plans:
single — the insured pays all premium up front at the time coverage is
placed;
annual — the insured pays premium at the time coverage is placed for the
first 12 months of coverage. The insured subsequently pays renewal premiums
to maintain coverage for successive 12 month periods, with such renewals due
prior to the expiration of the then applicable 12 month period;
monthly — the insured pays premium for the first month of coverage on
the loan close date. We subsequently bill the insured each month for the next
month's coverage; and
Monthly Advantage® — when we receive notice of the loan close date,
we bill the insured for the previous month of coverage (for coverage effective
as of the loan close date) and each month thereafter; with this premium plan,
the insured pays premium in arrears for the prior month of coverage.
In general, we may not terminate MI coverage except when the insured fails to
pay premium or for certain material violations of our Master Policy; although,
as discussed below, the terms of our Master Policy restrict our rescission rights
when certain criteria are met. For monthly or annual policies, MI coverage will
continue at the option of the insured lender, by payment of renewal premiums
at the renewal rate fixed when the loan was initially insured. Lenders may cancel
insurance on a loan at any time at their option or because of mortgage repayment,
which may be accelerated because a borrower refinances a mortgage or sells the
property. The GSEs' guidelines generally provide that a borrower on a GSE-owned
loan meeting certain conditions may require the mortgage servicer to cancel
BPMI upon the borrower's request when the principal balance of the loan is 80%
or less of the property's current value. The federal Homeowners Protection Act
of 1998 (HOPA) also requires the automatic termination of BPMI on most loans
when the LTV ratio (based upon the loan's amortization schedule) reaches 78%,
and provides for cancellation of BPMI upon a borrower's request when the LTV
ratio (based on the original value of the property) reaches 80%, upon satisfaction
of the conditions set forth in the HOPA. In addition, some states impose their
own notice and cancellation requirements on mortgage loan servicers.
Master Policy and Independent Validation
The terms of our primary mortgage insurance coverage are governed by our Master
Policy and its related endorsements, which we issue to each approved lender
with which we do business. The Master Policy sets forth the terms and conditions
of our MI coverage, including, among others, coverage terms, premium payment
obligations, exclusions or reductions in coverage, rescission and rescission
relief provisions, policy administration requirements, conditions precedent
to payment of a claim and loss payment procedures.
Our Master Policy generally protects us from the risk of material misrepresentation
and fraud in the origination of a loan by establishing the right to rescind
coverage in such event. We believe our Master Policy sets forth clear and straightforward
terms regarding our rescission rights, including limitations on our right to
rescind coverage when certain conditions are met, which we refer to as "rescission
relief." Our rescission relief provisions include several key components.
First, subject to our independent validation of coverage eligibility of an insured
loan, we agree in the Master Policy that we will not rescind or cancel coverage
of such loan for material borrower misrepresentation or underwriting defects
provided the borrower timely makes the first 12 monthly payments. The lender
chooses whether or not to have insured loans independently validated by us in
order to receive 12-month rescission relief. Second, if a borrower does not
make 12 timely payments or we have not completed an independent validation on
a loan, the loan is still eligible for rescission relief if the loan is current
after 36 months following origination and the borrower has had no more than
two 30-day delinquencies and no 60-day or greater delinquencies. Third, our
rescission relief provisions include additional limitations on our ability to
initiate an investigation of fraud or misrepresentation by a "First Party,"
defined in the Master Policy as our insured or any other party involved in the
origination of an insured loan.