May 22, CAS Annual Meeting Private Mortgage Insurance Industry Update Presented by:Kyle Mrotek, A.C.A.S., M.A.A.A. New Orleans, LA November 12, 2003

2 Milliman USA Private Mortgage Insurance (PMI) Industry Update Activities Reinsurance, Bulk Transactions, GSE’s Regulatory Taxes, RESPA Reform, GSE Reform

3 Milliman USA PMI Industry Update Activities Reinsurance Catastrophe protection Captive reinsurance Banks and mortgage lenders establish captive reinsurance companies Captive reinsurers assume mortgage insurance risk on loans originated by lender and affiliates

4 Milliman USA PMI Industry Update Activities Reinsurance (cont.) Captive reinsurance (cont.) Captive mortgage reinsurance is only about 10 years old Captives typically monoline like primary companies Isolated trust for each cedant Much growth, both in captive counts and premium ceded

5 Milliman USA PMI Industry Update Activities Reinsurance (cont.)

6 Milliman USA PMI Industry Update Activities Reinsurance (cont.) Source: Schedule F

7 Milliman USA PMI Industry Update Activities Reinsurance (cont.)

8 Milliman USA PMI Industry Update Activities Reinsurance (cont.) Captive reinsurance (cont.) Typically aggregate excess of loss contracts  Example: Reinsurer assumes layer 5% excess 5% of coverage for 25% of written premium Quota share contracts exist too, but less frequent

9 Milliman USA PMI Industry Update Activities Reinsurance (cont.) Captive reinsurance (cont.) Cede trends  Began relatively small (e.g., layers of coverage for 15%-16% of written premium)  Trended to deeper cedes (e.g., layers of coverage for 35%-40% of written premium)

10 Milliman USA PMI Industry Update Activities Reinsurance (cont.) Captive reinsurance (cont.) Cede trends (cont.)  More recently, industry leaders announce intent to reduce cede %’s –Reasons cited oRisk/reward balance, and oProfitability objectives

11 Milliman USA PMI Industry Update Activities Bulk Transactions Loan-level coverage written on pools of loans, often for securitization market Reporting of bulk transactions beginning 3 rd quarter 2001, so little history available. Large portion of involvement based on subprime loans (source: Inside Mortgage Finance) Analysts keeping close eye on bulk losses

12 Milliman USA PMI Industry Update Activities Bulk Transactions (cont.) Bulk business as percent of MI industry’s new insurance written 12% for 2 nd half, % for 2002 MGIC, UGC, Radian and PMI bulk primary MI market leaders Bulk primary MI in 2002  MGIC represents 25%  UGC represents 19% Source: Inside Mortgage Finance

13 Milliman USA PMI Industry Update Activities Government Sponsored Enterprises (GSE’s) Fannie Mae (formerly known as Federal National Mortgage Association) Freddie Mac (formerly known as Federal Home Loan Mortgage Corporation )

14 Milliman USA PMI Industry Update Activities GSE’s (cont.) Fannie Mae and Freddie Mac Quasi-governmental agencies Publicly owned corporations Represent roughly half of secondary mortgage market Compete against each other, as well as other entities  Enjoy implied governmental backing, so lower borrowing rates Source: Residential Mortgage Lending

15 Milliman USA PMI Industry Update Activities GSE’s (cont.) GSE Regulation Office of Federal Housing Enterprise Oversight (OFHEO) regulates Fannie Mae and Freddie Mac OFHEO established by Department of Housing and Urban Development (HUD) in 1992 Source: OFHEO website

16 Milliman USA PMI Industry Update Activities GSE’s (cont.) OFHEO’s mission - ensure the capital adequacy and financial safety and soundness of Fannie Mae and Freddie Mac Funded through assessments to Fannie Mae and Freddie Mac, so not funded by taxpayers Source: OFHEO website

17 Milliman USA Taxes Tax deductibility of PMI Mortgage insurance premiums proposed to be tax-deductible from federal income taxes Deduction to apply to homeowners whose adjusted gross income is $100,000 or less Argument is MI premium should be tax deductible because lenders, not homeowners, benefit from MI Source: Inside Mortgage Finance PMI Industry Update Regulatory

18 Milliman USA Taxes (cont.) Tax deductibility of PMI (cont.) Expected to allow “some 300,000 families, who now rent, to qualify for a mortgage” (American Homeowners Association) Predicted tax savings up to $700 on $135,000 loan (Milwaukee Journal Sentinel) MI industry in favor to “help level the playing field for private mortgage insurers against loans” (Inside Mortgage Finance) PMI Industry Update Regulatory

19 Milliman USA Taxes (cont.) Tax deductibility of PMI (cont.) Bi-partisan provision introduced March 2003, but cut by President Bush in final version of tax bill in June 2003 PMI Industry Update Regulatory

20 Milliman USA RESPA Reform RESPA – Real Estate Settlement Procedures Act (current version since 1992) Purpose: To inform borrowers of the costs associated with their loan and loan closing Requires lender to provide borrower with good faith estimate of the settlement costs Prohibits kickbacks and unearned fees Reason for some disclosure documents received during loan closing process Source: Residential Mortgage Lending PMI Industry Update Regulatory

21 Milliman USA RESPA Reform (cont.) RESPA reform proposed Provides safe haven from anti-kickback and unearned fees provision for Guaranteed Mortgage Packages (GMP)  Packaging could save consumers in closing costs Imposes tolerance levels in good-faith estimates Stipulates lender-paid mortgage broker compensation as credit to borrower Source: Mortgage Banking, February 2003 PMI Industry Update Regulatory

22 Milliman USA GSE Reform Treasury and HUD want Treasury to assume from HUD regulatory role of GSE’s HUD interested in maintaining authority of establishing affordable housing goals PMI Industry Update Regulatory

23 Milliman USA GSE Reform (cont.) OFHEO too small to effectively oversee actions of GSE’s Freddie Mac underreported earnings by $4.5 billion over 3 years Fannie Mae committed “computational error” of over $1 billion GSE’s have looser disclosure standards than other publicly traded firms PMI Industry Update Regulatory

24 Milliman USA GSE Reform (cont.) Parties for reform (i.e., lenders, banks) Lower borrowing costs (implied government backing) GSE’s enjoy too many benefits not permitted to competitors (Over $2 billion emergency crisis line of credit) Operating leverage too high, could compromise economy if default (less stringent risk-based capital standards) PMI Industry Update Regulatory

25 Milliman USA GSE Reform (cont.) Parties against reform (i.e., GSE’s) Provide savings to consumer in borrowing costs (according to Congressional Budget Office, 25 basis points) Provide liquidity for securitization market Finalization of reform not expected before year- end PMI Industry Update Regulatory

26 Milliman USA PMI Industry Update Closing Remarks Large political involvement Industry constantly evolving

27 Milliman USA Private Mortgage Insurance Q&A