Mortgage insurance: market structure, underwriting cycle and policy implications, Consultative document

Bank for International Settlements

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Date Published 2013
Primary Author Bank for International Settlements
Other Authors
Theme Retail Housing Finance


Mortgage insurance is used to protect mortgage lenders (ie originators and/or underwriters) by transferring mortgage risk, and notably tail risk, from lenders to insurers. Insurers by their nature provide services for events in the tail of distributions, whereas the banking sector tends to provide services closer to the mean of distributions. The events of the last few years, particularly those in the global financial crisis that began in 2007, indicate that MI is subject to significant stress in the worst tail events. In the worst cases, failure of a mortgage insurer may occur leading to resolution of the insurer, whereby some of the most extreme tail risk may revert to the lender at the very time that the insurance would be most needed, potentially creating systemic risk. At its most fundamental level, this report examines the interaction of mortgage insurers with mortgage originators and underwriters, and makes a set of recommendations directed at policymakers and supervisors which aim at reducing the likelihood of MI stress and failure in such tail events. The original impetus for this work can be traced back to the Joint Forum’s Review of the Differentiated Nature and Scope of Financial Regulation (“DNSR” – January 2010).3 This background is explained in Annex A. As is so often the case, making recommendations about interactions is fraught with difficulty: any complex system tends to react to changes in ways that are not necessarily completely predictable. Nonetheless, the Joint Forum has considered the effects of the crises over the last few years and endeavoured to identify steps that should help mitigate some of the problems and help to ensure consistently strong standards where MI is used.

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