Posted on Thursday, March 11, 2010
Godzilla v. the Blob?
We all know banks are struggling with loan buy backs, delinquencies, defaults and foreclosure, government interventions including reserve requirements, stress tests, regulators, executive comp restrictions, and pressure to lend. But you may not be aware of the on-going battle they also face with mortgage insurance companies.
Bank contracts with MI companies allow the MI companies to rescind a policy if they cvan demonstrate that the policy was issued under false premises, that the policy holder misrepresented its business, its risks or its underwriting practices. Most often these claims are based on inflated income, property value, employment, occupancy, DTI ratios, or a representation that loans met underwriting guidelines when the originator knew they didn’t.
The question is, what if MI companies are wrongly claiming the right to rescind simple to avoid or at least delay having to pay?
The concept certainly would not be a new one in the insurance industry - health and other insurance companies have been accused of worngly denying or trying to delay payment on claims for year. Given that many MI companies are also into other types of insurance, it would make sense that they might employ this same business startegy to their MI divisions. In fact insurance companies are probably tie banks for being the most distrusted by the average American.
Corporate announcements and timing in earnings calls indicate “post claims underwriting” and rescissions/claims denials may be a business loss mitigation strategy and not justified.
Fueling the suspicion is the way the MI companies have been touting their right to rescind in Press Releases and earnings calls which certainly makes the numbers appear to be part of their overall business strategy.
• Genworth Financial: Press release announcing losses in Q4 2008 and overall liquidity stated reducing loss exposure by $84 million by rescinding and denying.
• MGIC Investment Corporation: Q1 2009 call claims submitted on rescinded policies 5% Q3 2008. 15% Q4 2008. 20% Q1 2009. Rescissions materially mitigated 2008-2009 losses. In Q2 2009 call, amount rescinded in Q2 was 40% more than Q1.
• MBIA, Radian, Old Republic, United Guaranty, CMG Mortgage Insurance, California Housing Loan Insurance Fund (CAHLF)
As you can see from the above as well as the numbers below, the shear percentage of plocies rescinded has also decreased dramatically though arguably this may be due to an actual increase in the percentage of loans with fraud which I have felt for a long time was far under reporter and which we are learning was hugh during the bubble thanks to surges in subprime and speculator loans.
• 2008 12% to 21% per quarter. 2009 Q1 15.5%
• As of December 2009 rescission rates had jumped to 20 to 25% from 7% average.
• Highest defaults in 2006, 2007 and part of 2005 vintage; subprime, option ARMS, Alt A, 100% LTV, CA/FL/NV/AZ. Pre 2005 not so much. Worst in structured finance
And so the lawsuits begin;
• MBIA v Credit Suisse case; 85% of sample contained fraud. Not eligible for reduced docs, ignored inability to repay, intentional misrepresentation of due diligence.
• United Guaranty Mortgage Insurance Company v. Countrywide (2009 Cal US District Court) dismissed tort and statutory claims holding PIM company could not seek “pool wide” rescission of its mortgage insurance. Nothing in policy allowed pool wide rescission. Instead have to demonstrate breech of contract by Countrywide and breech of implied covenant of fair dealing and good faith on a loan by loan basis. Importance; determines whether can recover in tort and whether can rescind on pool wide basis.
• MI Companies also suing banks to get claims money paid back; MBIA sued Countrywide to recover funds it had already paid. But can’t get money back from failed banks and brokers claims already or will be paid to if later found sound not have been– over 300 since 2006.
• Objections by banks to rescissions can be made several years later.
One upside is this sends message originators, banks, secondary market that can’t act recklessly just because there’s insurance. I recall hearing FNMA's Daniel Mudd on NPR shortly after the AIG debacle responding to the question "what about the mortgage fraud. how will FNMA survive high levels of that?" by saying "we are not concerned about fraud. we have insurance protecting us."