mortgage insurance final 1

8/19/2019 Mortgage Insurance FINAL 1

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CHAPTER 1

INTRODUCTION OF INSURANCE

1.1 DEFINITION AND INTRODUCTION OF INSURANCE

A contract (policy) in which an individual or entity receives financial

protection or reimbursement against losses from an insurance company.

The company pools clients risk to make payments more affordable for the

insured.

Insurance is a form of risk management, primarily used to hedge against

the risk of a contingent loss. In essence, insurance is simply the equitable

transfer of a risk of a loss, from one entity to another, in echange for a

premium.

!ambling transactions also hedge against risk, but it offers the possibility

of either a loss or a gain. !ambling creates losers and winners, whereas in

insurance offers financial support sufficient to replace loss, not to create

pure gain. !amblers can continue spending, buying more risk than they

can afford, but insurance buyers can only spend up to the limit of what

carriers would accept to insure" their loss is limited to the amount of the

premium.

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!amblers, by creating new risk transfer, are risk seekers. Insurance buyers

are risk avoiders, creating risk transfer in terms of their need to reduce

eposure to large losses.

#arly methods of transferring or distributing risk were practiced by

$hinese traders as early as the %rd millennia &$. These merchants

travelling treacherous river rapids would cleverly distribute their wares

across many vessels to spread the loss due to any single vessels capsi'ing.

odern profit insurance manifested in &abylon almost *** years &.$., in

a contract contained a clause that the risk of loss due to robbery in transitwas borne by the party providing the loan. In consideration for bearing

this risk, the lender calculated interest on the loan at an eceptionally high

rate.

The geeks and +omans introduced the origins of health and life insurance

to us around ** A-, when they organi'ed guildsbenevolent societies

which afforded contribution towards burial costs or travelling epenses of members of the army. In echange for this benefit, members of the society

made regular contributions to it.

-uring this time, achaemenian (Iranian) monarchs were the first to

/insure0 their people to some etent, formali'ing the process by

registration thereof at court. In accordance with traditional, during norou'

the beginning of the Iranian new year1 the heads of different ethnic groups presented gifts to the monarch. The purpose of these gifts was to ensure

(insure) that whenever the gift1 giver was in trouble, the monarch (and the

court) would help him. In return, whenever the giver was in trouble or

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needed finance, the court would check the gifts registration, and could

even1 if the amount eceeded 2*,*** -errick1 double that in return.

All these instances gave effect to the concept of mutual assistance in case

of loss, but the actual concept of mutual assistance came to the fore in

guilds and similar associations and societies which eisted in #urope and

#ngland during the middle1ages.

These associations afforded members (or their dependants) assistance in

case of loss caused by perils such as fire, shipwreck, theft, sickness or

death. 3riginally, the etent of the assistance was determined by the actual

need of the member who suffered the loss, eventually, however, he would

be assisted to the etent of his actual loss. In many of these guilds

individual members, and not merely the guild itself, were under a legal

duty to assist those members who suffered a loss. 3nce provision was

made for the latter to have a corresponding legal right to claim such

assistance, the development towards proper mutual insurance was

completed.

4eparate insurance contracts (i.e. insurance policies not bundled with

loans or other kinds of contracts) were invented in !enoa in the 25th

century, as were insurance pools backed by pledges of landed estates.

These new insurance contracts allowed insurance to be separated from

investment, a separation of roles that first proved useful in marine

insurance. Insurance became far more sophisticated in post1+enaissance

#urope, and speciali'ed varieties developed

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3n % -ecember 2672, one hundred 8amburg house1owners concluded

the so called 98amburg fire contracts:, which are generally regarded as

some of the first eamples of true mutual insurance contracts that we have

today.

Toward the end of the seventeenth century, ;ondon/s growing importance

as a centre for trade increased demand for marine insurance. In the late

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carriers 1 was devised, a plan not unlike the $hinese farmers= solution a

thousand years earlier. This system is now commonly used in all types of

insurance.

The first American life insurance association was sponsored by a church

the Bresbyterian synod of Bhiladelphia and set up for the benefit of their

ministers and their dependants. Although there was initial religious

obCection against the practice of insurance bye a church, after 2


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Hlines of businessH that encompass personal, commercial, marine, aviation,

agriculture, life, health, financial and engineering insurance. irtually

anything from the mundane to the bi'arre 1 can be insured, as ;loyd=s is

famous for insuring the life, health, legs or even noses of actors, actresses

and or sports figures.

In the global era, Insurance companies are increasingly willing to spend

more on the customer satisfaction and brand building eercises. Though it

is one of the highly regulated industries, it still provides lot of scope for

creativity and innovations. As this industry is predominantly dominated by personal selling and personali'ed services, many a time the service

standards vary based on the intermediary involved in the process. In order

to achieve the competitive edge over others, it is necessary to standardi'e

the process and bring about quality improvement and get feedback from

the customers regarding the quality of services rendered. This will result

in customer satisfaction, customer retention, customer acquisition, and

employee retention and cost reduction. 4ervicing focuses on enhancing

the customer0s eperience and maimi'ing his convenience. This calls for

effective $ustomer +elationship anagement 4ystem, which eventually

creates sustainable competitive advantage and enables to build long

lasting relationship.

1.2 Introduction to insurance policies pre!iu!s and clai!s

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Insurance is designed to protect the financial well1being of insured in the

case of unepected loss. 4ome forms of insurance are required by law,

while others are optional. Agreeing to the terms of an insurance policy

creates a contract between you and the insurance company. In echange

for payments from you (called premiums), the insurance company agrees

to pay you sum of money upon the occurrence of a specific event. That

event may be as mundane as a visit to the doctor or as serious as a car

crash, depending on the type of insurance

After contracting an insurance company about entering into a policy, wereceive a quote, which is the total amount of money you will need to pay

over the term of the insurance policy in echange for coverage. Jhen we

have agreed to pay this amount and the insurance company has agreed to

insure, we will receive a copy of the policy detailing the terms and

conditions of policy

If an insured incident occurs, we can make a claim for payment from theinsurance company. Insured person will receive the amount insured for, in

the case of the specific incident minus a deductibles are associated that

you must pay for each claim.

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1." Purc#asin$ Insurance

Insurance was traditionally sold by agents who worked for insurers and

had a vested interest in selling you their specific policies. >ow, there are

more consumer1friendly options for acquiring insurance coverage.

Independent agents can sell policies from several different companies,

allowing them to be more obCective about your personal needs. These

individuals may even be able to provide a complete review of your

insurance needs, something you should do on a regular basis to keep your

policies up to date with your current financial situation. The web has also

become an ecellent resource for shopping for and even purchasing

insurance.

It is important to research any company that you are considering to

identify the quality providers. Jhen choosing an insurance company, it isimportant to find one with a good independent rating from 4tandard K

Boor0s or another leading rating service. This will tell you whether the

company is likely to be able to pay off claims even in the event of a

disaster that leads to an abundance of payouts. +ecommendations from

individuals and consumer information publication in print and on the web

may be able to provide additional information related to the quality of

service. These considerations may include likelihood of a claim being

paid, speed of payout, customer service and other services available from

the company.

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Burchasing more than one policy from a single insurer can save money in

the form of discounts. Therefore, it may be in best interest to single out

companies that will provide quality coverage in all of the areas that is

interested in, instead of piecing together your coverage from many

different insurers

CHAPTER 2

%EANIN& OF %ORT&A&E

2.1 DEFINITION OF '%ORT&A&E(

A debt instrument, secured by the collateral of specified real estate.

Broperty that the borrower is obliged to pay back with a predetermined set

of payments. ortgages are used by individuals and businesses to make

large real estate purchases without paying the entire value of the purchase

up front. 3ver a period of many years, the borrower repays the loan, plus

interest, until heshe eventually owns the property free and clear.

ortgages are also known as Hliens against propertyH or Hclaims on

property.H If the borrower stops paying the mortgage, the bank can

foreclose. .

In a residential mortgage, a home buyer pledges his or her house to the

bank. The bank has a claim on the house should the home buyer default on

paying the mortgage. In the case of a foreclosure, the bank may evict the

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home/s tenants and sell the house, using the income from the sale to clear

the mortgage debt.

ortgages come in many forms. Jith a fied1rate mortgage, the borrower

pays the same interest rate for the life of the loan. 8er monthly principal

and interest payment never change from the first mortgage payment to the

last. ost fied1rate mortgages have a 261 or %*1year term. If market

interest rates rise, the borrower0s payment does not change. If market

interest rates drop significantly, the borrower may be able to secure that

lower rate by refinancing the mortgage. A fied1rate mortgage is alsocalled a 9traditionalH mortgage.

Jith an adCustable1rate mortgage (A+), the interest rate is fied for an

initial term, but then it fluctuates with market interest rates. The initial

interest rate is often a belowmarket rate, which can make a mortgage

seem more affordable than it really is. If interest rates increase later, the

borrower may not be able to afford the higher monthly payments. Interest

rates could also decrease, making an A+ less epensive. In either case,

the monthly payments are unpredictable after the initial term.

3ther less common types of mortgages, such as interest1only mortgages

and payment1option A+4, are best used by sophisticated borrowers.

any homeowners got into financial trouble with these types of

mortgages during the housing bubble years.

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2.2 AD)ANTA&E AND DISAD)ANTA&E OF %ORT&A&E

It is impossible to buy a home without a mortgage. !etting hundreds of

thousands of pounds together to put down as one lump sum is a privilege

reserved for very few.

As it stands, it0s as much as most homebuyers can do to scrape together a

deposit. The rest has to be borrowed from a bank or building society.

Dortunately, there are hundreds of lenders offering a whole range of

different types of mortgages. ost mortgages are now only offered on a

repayment basis which means you repay part of the capital and the interest

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every month. At the end of the term, which is usually between 6 and %*

years, your mortgage debt will have been totally repaid.

4ome lenders allow you to take out an interest1only mortgage which

means that your monthly payments only cover the interest. ?ou therefore

need to have a plan in place so that you can afford to repay the amount

you initially borrowed in full, at the end of the term.

any maCor lenders have withdrawn from the interestonly market,

while others have tightened their criteria making them harder to get

because of concerns that thousands of people have interest1only mortgages

with no means of repaying them.

3pting for interest1only might seem attractive because your monthly

repayments will be lower than with a repayment mortgage, but unless you

have a solid plan to pay back the capital it0s best to go for a repayment

loan.

AD)ANTA&ES OF A %ORT&A&E

A !ort$a$e !a*es #o!e o+ners#ip a,,orda-le

&uying a home is likely to be the biggest purchase you0ll ever make and amortgage will be your largest debt. &ecause you can spread the

repayments on your home loan over so many years, the amount you0ll pay

back every month is more manageable, and affordableL

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Traditionally, when people take out their first mortgage, they0ve tended to

opt for a 6 year term. 8owever, there are no rules about this and as we

are living longer and the retirement age is going up, %*year mortgages

are becoming more common. This can help bring your monthly payments

down, but on the flip side you0ll be saddled with the debt for longer.

There are two basic types of mortgages available repayment, or interest

only.

• A !ort$a$e is a cost/e,,ecti0e +a o, -orro+in$

Interest rates on mortgages tend to be lower than any other form of

borrowing because the loan is secured against your property. This means

the bank or building society has the security that if it all goes wrong and

you can0t repay it there is still something valuable your property to

sell to pay back some if not all the mortgage.

Interest rates on mortgages are constantly changing over the years

they0ve been higher than 26** and lower than M. Died rate and tracker

mortgages tend to be the most popular, but there are also discount and

offset mortgages, plus products aimed at first time buyers and landlords.

3ur guide on different types of mortgages eplains these in more depth.

There are a number of government schemes available to help people buy

their first home such as 8elp to &uy, Dunding for ;ending and >ew &uy.

4ome shared1ownership schemes where you only buy part of the property

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and rent on the proportion you don0t own yet are run by the local council

or housing trusts.

DISAD)ANTA&ES OF A %ORT&A&E

ou3ll pa -ac* a lot !ore t#an ou ori$inall -orro+ed

The most obvious disadvantage is that you are carrying an enormous

debt over a long time. The other maCor drawback is that since then

ortgage is secured on your property, you have to be able to keep up

with your mortgage repayments or you could lose your home. -uring

the credit crunch, lenders worked hard at keeping even those struggling

with the mortgage in their home. &ut if homeowners really can0t make

the repayments, their home will be repossessed. The bank or building

society will then sell it to recover their money.

4atc# out ,or ,ees

It0s not only the cost of interest that mounts up when you have a mortgage.

Dees can also be hefty. There will be set up costs each time you take out a

new mortgage and these vary significantly but some areas high as

N,***.It also incurs convincing costs and there are penalty fees to watch

out for if you need to get out of your mortgage deal early.

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CHAPTER "

%ORT&A&E INSURANCE

".1 DEFINITION OF (%ORT&A&E INSURANCE(

An insurance policy that protects a mortgage lender or title holder in the

event that the borrower defaults9on payments, dies, or is otherwise unable

to meet the contractual obligations of the mortgage. ortgage insurance

can refer to private mortgage insurance (BI), mortgage life insurance, or

mortgage title insurance. Jhat these have in common is an obligation to

make the lender or property holder whole in the event of specific cases of

loss.

ortgage Insurance (also known as mortgage guarantee and home1loan

insurance) is an insurance policy which compensates lenders or investors

for losses due to the default of a mortgage loan. ortgage insurance can

be

#ither public or private depending upon the insurer. The policy is also

known as a mortgage indemnity guarantee (I!), particularly in the EF.

ortgage insurance may come with a typical pay1as1you1goH premium

payment, or may be capitali'ed into a lump sum payment at the time the

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mortgage is originated. Dor homeowners who are required to have BI

because of the


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4ponsorship and structure vary greatly and include privately capitali'ed

firms, non1 profit>*6, and a growing variety of public1private

partnership arrangements. ost programs today are relatively small, with

limited operating eperience that has yet to include survival through a

period

ortgage insurance began over 2** years ago in the Enited 4tates as an

adCunct to title insurance and was used to stimulate private investor

interest in purchasing 9guaranteed mortgages: from mortgage companies.

All such guarantee programs failed with the advent of the !reat-epression in the early 27%*% due to inadequate reserves, ineffective

regulation, conflicts of interest, and bad property appraisal practices.

!overnmentsponsored I began in the Enited 4tates in 27%5 with the

creation of the Dederal 8ousing Administration and the utual ortgage

Insurance Dund. The primary purpose was economic and financial

stimulus, via new housing construction. This unsubsidi'ed D8A program

has operated successfullyforover@6years.

The 276*6 and 27*< saw government1sponsored I programs initiated

internationally, including in $anada, Australia, the >etherlands, the

Bhilippines, the -ominican +epublic and !uatemala. -uring these two

-ecades, private1sector I providers also began operating in the Enited

4tates.

In the late 27


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risk and financial management and regulatory reforms. &eginning in the

late 277*s many new public and private I programs were established in

#urope, Africa, the ideast, ;atin America and Asia, in support of both

primary lending and emerging securiti'ation markets. The recent credit

crisis is testing the staying1power of some countries0, I1programs.

"." Contracts

As with other insurance, an insurance policy is part of the insurance

transaction. In mortgage insurance, a master policy issued to a bank or

other mortgage holding entity (the policyholder) lays out the terms and

conditions of the coverage under insurance certificates. The certificates

document the particular characteristics and conditions of each individual

loan. The master policy includes various conditions including eclusions

(conditions for denying coverage), conditions for notification of loans in

default, and claims settlement.

The contractual provisions in the master policy have received increased

scrutiny since the subprime mortgage crisis in the Enited 4tates. aster

policies generally require timely notice of default include provisions on

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monthly reports, time to file suit limitations, arbitration agreements, and

eclusions for negligence, misrepresentation, and other conditions such as

preeisting environmental contaminants. The eclusions sometimes

have Hincontestability provisionsH which limit the ability of the mortgage

insurer to deny coverage for misrepresentations attributed to the

policyholder if twelve consecutive payments are made, although these

incontestability provisions generally don/t apply to outright fraud.

$overage can be rescinded if misrepresentation or fraud eists. In **7,

the Enited 4tates -istrict $ourt for the $entral -istrict of $alifornia

determined that mortgage insurance could not be rescinded Hpool wideH.

".6 T#e Di,,erin$ Roles o, &o0ern!ents in %I %ar*ets

I provides additional financing fleibility for lenders and consumers. As

mentioned at the roundtable, I is less necessary and therefore less

beneficial in Curisdictions where mortgage origination is characterised by

low loan1to1value ratios (and therefore high down payments). !overnment

policymakers should consider whether I can be used prudently in

conCunction with ;T requirements to meet housing goals and needs in

their respective markets. In some countries the use of I is achieved by

direct participation and in others through indirect incentives.

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Dor eample, the $anadian I market is dominated by a single public

insurer, ($anada ortgage and 8ousing $orporation) and a small number

of private firms. To make it possible for private mortgage insurers to

compete effectively with $8$, the !overnment of $anada guarantees

the obligations of private mortgage insurers to lenders through legislation

that protects lenders in the event of default by the insurer. The

government0s backing of private insurers0 business is subCect to a

deductible equal to 2*M of the original principal amount of the mortgage

loan. ;oans insured by government1backed mortgage insurers must adhere

to specific underwriting parameters established by the government.

Through this institutional arrangement, the government influences sound

mortgage underwriting practices for the Industry. A similar proposal is one

option under a report to E4 $ongress 9+eforming America0s 8ousing

Dinance arket:. 2*

In some countries, capital relief is applied to mortgages covered by

government guarantee schemes aimed at providing incentives for lenders

to serve more vulnerable categories, which a few Curisdictions especially

in #urope (e.g., Drance, >etherlands) use. Although these schemes provide

protection to lenders against borrowers0 default, they are different from

9mortgage insuranceH in the common usage of the term.

".7 Re$ulator ,ra!e+or* t#at applies to !ort$a$e insurers

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The Ooint Dorum investigated the types of insurers that provide I, and

whether they are monoclines. A monocline requirement will protect the

remainder of the insurance sector from an adverse event in mortgage

insurance. 3n the other hand a monocline mortgage insurer and the

mortgage originators will have increased risk due to= the lack of

diversification. iews differ regarding which outcome is preferable.

The Ooint Dorum also looked at whether mortgage insurers are regulated

under the normal insurance prudential rules in the Curisdiction, or whether

specialised rules are applied. Jhile I underwriters can be

+egulated under normal insurance prudential rules, for the most part

additional specialised rules are required to recognise the risks posed by

2.

CHAPTER 6

TPES OF %OR&A&E INSURANCE

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6.1 Tpes o, !ort$a$e insurance

ortgage Insurance is an insurance policy which compensates lenders or

investors for losses due to the default of a mortgage loan. ortgage

insurance can be either public or private depending upon the insure, that

means mortgage can be insured through the Dederal 8ousing

Administration or by private mortgage insurance companies.

Pu-lic Role in %I

Bublic I programs, even without direct subsidies, typically include a

social purpose, including some form of socioeconomic targeting. 4uch

program targeting often includes some combination of income, home price

or insured loan limits. $ertain types of public subsidy programs, such as

down payment assistance, can be productively combined with public I"

however, the public I program itself should not provide subsidies that

undermine its capital reserves and increase eposure to the national

treasury.

I, including both private and public programs, needs effective

regulation, the most important element of which is a requirement to build

and hold segregated capital reserves that are adequate to pay all claims in

the event of economic catastrophe. In order to avoid the need for

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government 9bailouts: of public 2 or insolvency of private providers,

I programs should be required to operate under sound

business principles, including actuarially based pricing and independent

financial audits. Dinancial regulators that grant risk1based capital reliefto

banks that use public or private I protection need to know that those

insurance and guarantee programs will be amply capitali'ed to pay claims

over time and under stress.

arious forms of public1private I partnerships have emerged with some

success over recent decades, including government1sponsored programs

reinsured by private I providers (e.g., 8ong Fong, Enited 4tates)

• Brivate I programs reinsured by a public l provider (e.g., $anada)

• Bublic sponsorship with Coint public1private governance structure (e.g

the >etherlands)

• Bublic and private financial support for special purpose >!3 (e. 4outh

Africa)

PRI)ATE %ORT&A&E INSURANCE

Jhen looking into financing, most borrowers want to avoid paying private mortgage insurance. Brivate ortgage Insurance (BI) is

generally required on conventional loans when the loan amount is greater

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house). The two types of mortgage insurance are &orrower Baid (&BI)

and ;ender Baid (;BI).

5orro+er Paid or 5P%I

&BI or HTraditional ortgage InsuranceH is default insurance on

mortgage loans provided by private insurance companies and paid for by

borrowers. &BI allows borrowers to obtain a mortgage without having

to provide *P * down payment, by covering the lender for the added risk

of a high loanto1value (;T) mortgage. The E4 8omeowners

Brotection Act of 277< allows for borrowers to request BI cancellation

when the amount owed is reduced to a certain level. The Act requires

cancellation of borrower1paid mortgage insurance when a certain date is

reached. This date is when the loan is scheduled to reach @


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closing, the investors Dannie ae and Dreddie ac allow mortgage

servicers to follow the same rules for secondary residences. Investment

properties typically require lower ;Ts.

There is growing trend for &BI to be used with Dannie ae %M down

payment program. In some cases, the ;ender is giving the borrower a

credit to cover the cost of &BI.

" 8ENDERS PAID %ORT&A&E INSURANCE OR 8P%

8enders !ort$a$e insurance 98%I: also *no+n as pri0ate !ort$a$e

insurance 9P%I: in the E4, is insurance payable to a lender or trustee for

a pool of securities that may be required when taking out a mortgage

loan.

It is insurance to offset losses in the case where a mortgagor is not able to

repay the loan and the lender is not able to recover its costs after

foreclosure and sale of the mortgaged property.

Includes the cost of the insurance in the form of a higher rate. In echange

for covering the BI, the lender charges you a slightly higher rate for the

life of loan.

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;I normally results in a lower monthly mortgage payment than &BI.

This type of mortgage insurance can0t be cancelled.

The ;BI is usually an attractive option if you are likely to move or

refinance within @12* years.

;BI may have ta benefits compared to borrower paid monthly which is

no longer ta deductible.

6.2 FEDERA8 HOUSIN& AD%INISTRATION ( %ORT&A&E

INSURANCE

An D8A = insured loan is a E4 Dederal 8ousing Administration mortgage

insurance backed mortgage loan which is provided by a D8A approved

lender. D8A insured loans are a type of federal assistance and have

historically allowed lower income Americans to borrow money for the

purchase of a home that they would not otherwise be able to afford. T o

obtain mortgage insurance from the Dederal 8ousing Administration, an

upfront mortgage insurance premium (EDIB) equal to 2.@6 percent of

the base loan amount at closing is required, and is normally financed into

the total loan amount by the lender and paid to D8A on the borrower=s

behalf. There is also a monthly mortgage insurance premium (IB) which

varies based on the amorti'ation term and loan1to1value ratio.

The program originated during the !reat -epression of the 27%*%, when

the rates of foreclosures and defaults rose sharply, and the program was

intended to provide lenders with sufficient insurance 4ome D8A programs

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were subsidi'ed by the government, but the goal was to make it self1

supporting, based on insurance premiums paid by borrowers. 3ver time,

private mortgage insurance (BI) companies came into play, and now

D8A primarily serves people who cannot afford a conventional down

payment or otherwise do not qualify for BI. The program has since this

time been modified to accommodate the heightened recession. The D8A

employs a two1tiered mortgage insurance premium (IB) 4chedule.

>ew D8A mortgages and refinances of an eisting D8A mortgage which

was endorsed by the D8A on, or after, Oune 2, **7 are subCect to anupfront mortgage insurance premium (EDIB) of 2.@6M and an annual

mortgage insurance premium (IB) of up to 2.*6M. Epfront and annual

mortgage insurance premiums for D8A loans which replace eisting D8A

which were endorsed by the D8A prior to Oune 2, **7 via the D8A0s

streamline refinance program pay *.*2M and *.66M respectively.

CHAPTER 7

5ENEFITS OF %ORT&A&E INSURANCE

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7.1 T#e 1; 5ene,its o, %ort$a$e Insurance to consu!ers

1. Ho!e o+ners#ip

Jith the right preparation and resources, you can buy a home that best

suits your lifestyle. ortgage insurance provides you with innovative

options to help get you into home ownership.

2. Eli$i-le ,or a -etter interest rate

ortgage insurance provides a lender with the fleibility to offer you the

same competitive mortgage interest rates available to home buyers with a

larger down payment.

". %ore do+n pa!ent options

-on0t let the down payment be the barrier to your home ownership

dreams. There are many mortgage insurance products that will help you to

achieve home ownership.

6. 5u instead o, rentin$

7. O0erco!e traditional -arriers to ,inancin$.

ore and more homebuyers who may not have qualified for a mortgage

are benefiting from mortgage insurance for eample, those who are

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self1employed or work on commission. Jith mortgage insurance, people

who have good credit but might not meet conventional lending criteria can

qualify for the financing they need.

. &et !one -ac* on an ener$/e,,icient #o!e.

If you purchase an energy efficient home or refinance an eisting home to

make energy1saving renovations, you could be eligible to receive a 2*M

refund on your mortgage insurance premium if your mortgage is insured

with !lenworth Dinancial $anada.

?. Sa0e on #ouse#old purc#ases.

Jhen buying your first home, you0ll find epenses can add up quickly.

Jhen insured with !lenworth Dinancial $anada, you can take advantage

of the 8omebuyer Brivileges program, which offers savings on appliances,

truck rentals, home1improvement materials, moving 4upplies, and more.

@. Ta*e it +it# ou +#en ou !o0e.

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If you have a mortgage that0s portable, you can transfer its terms to a new

property in the future. This same option is available when you0 buy

mortgage insurance, which can save you premiums when you move.

1; &et #elp +#en ou need it.

Jhether from a Cob loss, a serious illness, or a marriage breakup, financial

difficulties can arise when you least epect them. ortgage insurance

gives cover policy.

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7.2 5ene,its to indi0idual countr

The benefits of I, depending on an individual country0s needs and

circumstances, can includeG

• Increasing access to homeownership financing for borrowers of

limited means.

• #panding lenders0 housing finance opportunity by reducing credit

risks

• 8elping to grow mortgage secondary and capital markets by

attracting risk1averse investors

• 4timulating economic activity through increased housing

construction

•

4trengthening mortgage lending standards, standardi'ation, andhousing finance sector stability

&eyond advancing homeownership or other primary housing policy goals

such as improving the quality of the housing stock, the main Enderlying

obCective of I is to protect and stabili'e a country0s banking and housing

finance sector in the event of economic catastrophe, i.e., severe recession

or depression. I risk is unusual in terms of its long1term cyclical

eposure and its dependence upon government economic policies.

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%ort$a$e insurance in India

The plan of !eneral Insurance $orporation (!I$) and >ational 8ousing

&ank (>8&) to float the country=s first mortgage insurance company is

about to gain momentum. This follows finance minister B $hidambaram0s

budget proposal to put in place regulations to allow creation of mortgage

guarantee companies.

Interestingly, !I$ and >8& have started talks with Bhiladelphia1based

+adian Insurance to float a Coint venture mortgage insurance company.

Though the shareholding pattern of the proposed O is unknown, industry

sources indicated that !I$ is likely to hold the maCority stake. +adian

Insurance, on the other hand, being the foreign partner will only be

allowed to hold up to M.

A number of issues are involved in floating such a company and !I$=s

proposal is at a conceptual stage, a senior !I$ official told #T. &ut the

official declined comment on the shareholding pattern. Jhen contacted,

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>8&=s eecutive director + erma was non1committal on >8&=s equity

participation in the proposed venture.

At this stage, we are only involved in structuring the product. The

government has reaffirmed its support to develop a mortgage insurance

market in the country. >ow, we are waiting for further direction on

structuring of the product from the regulators, r erma said.

#arlier in **%, >8& had to abort its plans to float mortgage insurance,

along with four foreign partners, since it failed to get regulatory clearance.

Therefore, if the new proposal materialises, it will be the first mortgage

insurance company in India. According to sources, !I$ has already

submitted a proposal to Insurance +egulatory -evelopment Authority

(I+-A). I+-A, in turn, has referred the matter to the +eserve &ank of

India (+&I).

In a market where rising property prices and high home loan interestrates are enveloping the customer, a mortgage insurance product may be

the solution. The benefits of this product are phenomenal in that they are

advantageous to the home loan borrower, lender and the market. The

primary advantage of a mortgage guarantee product would be that it

would enable the customer to get funds on

#asier terms, with not too much equity from his side.

Typically, mortgage insurance products are insurance tools that help an

individual to buy a house with a low down payment 1 less than the usual

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average * percent that he is epected to provide from his pocket. A

mortgage insurance product is now being launched for the first time in

India, with the E41based !lenworth Dinancial Inc introducing residentialmortgage guarantee products. The company has received permission

from the Doreign Investment Bromotion &oard (DIB&) to introduce these

products with an investment of Q6* million. 3f this, [email protected] million would

be brought up front and the remaining within the net 5 months.

#arlier, the >ational 8ousing &ank tied up with four international

corporations to form the India ortgage !uarantee $ompany (I!$) to

bring in such a product in the market. 8owever, the +&I has still to come

up with the regulatory framework for such a mortgage insurance

company to operate. The five partners in I!$ are the Enited !uaranty

$ompany (E!), the Asian -evelopment &ank (A-&), the $anada

ortgage and 8ousing $orporation ($8$), the International Dinance

$orporation (ID$), and the >ational 8ousing &ank (>8&).

The company=s primary product would be a mortgage guarantee,

providing coverage to India=s mortgage lenders in the event of a borrower

default. The guarantee product will be a three1way contract between the

borrowers, lenders and the mortgage guarantor (I!$). The guarantee

scheme is intended to allow lenders to penetrate broader market segments by offering increased access to more affordable mortgage terms and

conditions and epand home ownership in the country. Indirectly, the

credit enhancement aspects of the guarantee will allow lenders to access

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lower cost funds.

According to financial analyst +avi Fumar, there is a huge need for such products in the Indian scenario, and they will be a huge success once

launched. These products are purchased by the lenders and paid for by

the borrowers. A typical borrower who finds it difficult to raise the down

payment required for purchase of his property would find this product to

his advantage. It would also serve to cater to segments which have

hitherto been unserved or underserved . 4uch products help the housing

finance institutions to serve segments which are perceived to be high

risk, but which in reality may not be so. These include self1employed

professionals, traders and other segments who do not have a predictable

repayment pattern. It would also help borrowers who have less collateral

guarantee and personal guarantee to get loans.

It is a risk mitigation tool for housing finance institutions in that the

insurance or the guarantee company serves as a back1up institution to

handle the risk more efficiently. Internationally, back1up institutions

broaden the housing finance institutions and all high loans to value ratios

are mandatorily insured. 8ere, even as many housing finance institutions

are vying with each other to give high loan1to1value ratios in order to

grab the market, there is an inherent risk. A guarantee company can

mitigate the risk of the lending company while allowing for low equityfrom the customer. These guarantee companies with their overseas

eperience and norms will not allow the lending institutions to dilute

their standards, Cust because the risk is being handled by somebody else.

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>ational 8ousing &ank #ecutive -irector + erma says this product

would serve to give the housing finance segment the requisite stability,which would in turn bring stability to the entire financial system. The

product may come to the borrower at a premium but it is also true that 26

percent of equity has a cost, which the borrower can now utilise

elsewhere. In other words, the money that he would have to raise from

his pocket could now be invested elsewhere.

The lending institution would now, with the guarantee available, be ready

to enhance the loan amount given. This is because in case of default, the

lending institution gets reimbursed by the guarantee company. 8ence,

there is no cash loss to the lender. In many cases, the housing finance

institutions would also be prepared to absorb the cost of the guarantee

premium.

In developed countries, loans which are guaranteed attract lower risk

weight. Jith the reduced risk weights, the locked up regulatory capital

will get released.

Thus, the lending institution would have that much more capital available

to lend.

The guarantee product enables the lending institution to lend to the

borrower with greater comfort and less risk. The minute there is less risk,

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there are better prices. In other words, the lender provides funds at a

lower rate of interest. Thus, even if you add the guarantee cost, the

customer would be able to get cheaper loans. There could be different products appropriate for different segments. These guarantee companies

specialise in risk in the housing sector. They have done their research and

market surveys for different kinds of products.

The housing finance companies could also securities its portfolio and sell

it to investors. 4ince it is guaranteed, it would be able to attract a finer

rate. The lender would thus get more liquidity. ;arger fund flow through

securitising the portfolio means lower cost of funds accruing to the

lender. This would also, in turn, have an impact on the housing interest

rates, which will come down, and allow for risk diversification. The risk

in the housing finance gets transported to investors and migrates from the

housing finance companies to the capital market. 8owever since these

papers are guaranteed, it would be a credit enhanced paper for theinvestor. International investors would have an appetite for such papers,

which would thus help bring international capital to the housing market.

Though housing finance has witnessed aggressive players, there is still a

huge segment which is uneplored and under1penetrated. 8ousing

finance

$ontributes only three percent of !-B, and there is huge potential for

this sector to epand.

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Top !ort$a$e co!panies in India

Entil the economic renaissance that took place in the early 277*s in India,

the companies under Indian mortgage insurance sector were categori'edas unorgani'ed sector. The mortgage insurance companies perform the

task of facilitating financial loans to borrowers against any valid insurance

bought by the borrowers. Jith the growth of infrastructural industry in

India during the early 277*s, the mortgage finance companies went

through a tremendous stage of growth.

The growth of mortgage insurance sector in India was further fuelled by

the growth of real estate business in India. Till the year ***, there were

only few mortgage insurance companies in India and after that with the

growth of insurance sector as a whole, brought about tremendous

improvement in the mortgage sector as well. The names of top mortgage

insurance companies in India are given belowG

Top < !ort$a$e insurance co!panies in India

R 84&$

R 4tandard &ank

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R Fotak ahindra &ank

R Enited &ank of India

R 4&I 8ousing Dinance

R 8-D$ &ank

4ome of the details regarding these top players in the mortgage insurance

sector in India are given belowG

HS5C

ortgage insurance is one among the different financial services offered

by 84&$, which is an insurance policy meant for the purpose of

protecting the money lender from any default done by the borrower. This

type of insurance is commonly used by the bank for loans with a loan1to1

value ratio of over


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mortgage insurance, dream start comprehensive insurance and

homeowner0s comprehensive insurance.

ota* %a#indra 5an*

Fotak ahindra &ank belongs to the popular Fotak ahindra !roup,

which came into eistence in the year 27


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8-D$ is one of the popular names in the banking sector in India and they

offer the best mortgage insurance service to their customers, who are in

need of home loans

In addition to these companies there are also other mortgage insurance

providers in India like I$I$I, >ational Insurance, etcS. who are offering

the best service like the aforesaid companies.

ARTIC8E

INDIA &ETS FIRST %ORT&A&E &UARNTEE ENTIT AN NH5

BOINT )ENTURE

The >ational 8ousing &ank (>8&) on onday announced formation of

an Indian ortgage !uarantee $ompany, a Coint venture with E41based

financial security company !en worth, the Asian -evelopment &ank and

the International Dinance $orporation.

41

http://www.business-standard.com/search?type=news&q=National+Housing+Bankhttp://www.business-standard.com/search?type=news&q=Asian+Development+Bankhttp://www.business-standard.com/search?type=news&q=Financehttp://www.business-standard.com/search?type=news&q=Asian+Development+Bankhttp://www.business-standard.com/search?type=news&q=Financehttp://www.business-standard.com/search?type=news&q=National+Housing+Bank


42/59

This is the first mortgage guarantee company in India. Its aim is to offer

credit risk coverage in the form of guarantees to housing finance

companies and banks in case of borrowers defaulting. This would help

mortgage lenders avoid piling bad debts in their books.

>8& holds %< per cent stake in the venture and !en worth % per cent,

while A-& and ID$ have 2% per cent each.

The initial paid1up capital is +s 2* crore, to be increased over time to

support the new company0s growth.

9Je have received the Doreign Investment Bromotion &oard0s approval

and will be applying to the +eserve &ank of India for registration in a

couple of days,: said + erma, chairman and managing director of

>8&. I!$ will be a purely commercial venture.

The company will begin marketing operations and develop internal

operational policies before it gets registered with +&I.

The company will have processes for approving lenders and housing loans

for guarantee cover and help in maintaining the asset quality of lending

institutions. 9Adapting itself to the Indian contet with a range of

customised products for the lending industry and borrowing community,

the company will operate under the regulatory Curisdiction of +&I,: erma

told &usiness 4tandard. 3n the products it would offer, the $- said

these would be discussed at the first board meeting, on Ouly 6.

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I!$ is epected to focus on residential mortgage1backed securitisation

and growth of the secondary mortgage market. Thomas -avenport, ID$

-irector for 4outh Asia, said the new company will help epand access to

affordable housing finance across income segments and regions.

;akshmi enkatachalam, vice1president of private sector and co1financing

operations at A-&, said I!$ would not only benefit banks and housing

finance companies but also many new home loan borrowers.

4tuart Take of !en worth0s global mortgage insurance division said the

Coint venture would allow Indians to accelerate their dream of home

ownership.

CASE STUD

OTA %AHINDRA 5AN

Fotak ahindra &ank ;td is a one stop shop for all banking needs. The

bank offers personal finance solutions of every kind from savings

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accounts to credit cards, distribution of mutual funds to life insurance

products. Fotak ahindra &ank offers transaction banking, operates

lending verticals, manages IB3s and provides working capital loans.

Fotak has one of the largest and most respected Jealth anagement

teams in India, providing the widest range of solutions to high net worth

individuals, entrepreneurs, business families and employed professionals.

ortgage Brotection Insurance provides coverage that decreases as the

balance of the loan decreases. This protection will provide peace of mind

to your loved ones, by repaying the outstanding balance of your mortgage,in the event of death.

CREDIT 8IFE

It is a !roup insurance product offered by Fotak ahindra 3ld utual

;ife Insurance ;td to individuals who avail car loan K Bersonal ;oan.

The Insurance $over is provided for the outstanding principal.

5ene,its

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1. De-t Repa!ents 8elps repayment of loans undertaken for purchase

of house, car or for any other personal financial requirement in case of

your unfortunate absence.

2. Inco!e Replace!ent ;ife insurance provides the cash resources to

the dependents to take care of the day1to1day living epenses and also

ensure that the children get the best education possible in the absence of

the bread winner.

". %aintenance o, Standard o, 8i0in$ 8elps to maintain the standard of

living of the family and ensure continuity in the long term plans of the

family.

6.%edical E!er$enciesG $ritical illness rider of a life insurance plan

ensures that suitable amounts of money is made available on diagnosis of

specified critical illnesses and thereby enable the best medical treatment.

7. Estate Plannin$ ;ife Insurance is also apt investment tools for leaving

an estate and therefore, a legacy for your childrengrandchildren.

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. Retire!ent Plannin$ ;ife insurance products can help you plan an

adequate annuity to lead a comfortable, independent and carefree retired

life. =

Ter!s Conditions

$redit ;ife Insurance is a !roup Insurance Broduct where all eligible

customers who opt for this product K take $ar Bersonal ;oan from FB;

are covered. This $over is available only to Individuals.

The Insurance cover is provided for the outstanding principal.

• The application should be between the age group of 2


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• &enefits under kotak loan cover will cease in case your loan tenure

ends.

• Fotak ahindra 3m mutual ;ife insurance ltd decision in respect

of all aspects of insurance will be final.

• To ensure that your benefits under kotak car loan cover remain in1

force you must regularly pay your loan #I=s on time to FB;. .

• This benefit is not transferable and the offer can be modified,

suspended, or withdrawn at any time by FB;.

• Insurance cover and all benefits in respect thereof are subCect to the

terms and conditions of the F3 policy D as contracted by and

between FB; and F3.

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CASE STUD

SCOTIA %ORT&A&E PROTECTION

The &ank of >ova 4cotia commonly known as 4cotia bank is the third

targets bank in $anada by deposits and market capitali'ation. It serves

more than 2 million customers in over 66 countries around the world and

3ffers a broad range of products and services including personal and

commercial banking, wealth management, corporate and investment

banking. Jith assets of Q@72.< billion, 4cotia bank shares trade on the

Toronto and >ew ?ork stock echanges.

4cotia ortgage Brotection can allow you and your family to maintain the

home and lifestyle you have worked hard to build. 4afeguarding your

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family=s mortgage debt can provide the comfort and stability you need,

when you need it most.

;ife $overage

$ritical Illness $overage

-isability $overage

4cotia ortgage ;ife $overage

Fnowing your mortgage could be paid off should you suddenly pass away

can give you and your family financial comfort when you need it most.

Jith ;ife coverage, the principal and interest remaining on your 4cotia

bank mortgage can be paid up to a maimum of Q6**,*** per mortgage

(or up to Q@6*,*** for all mortgages combined) so that your loved onescan maintain the home and lifestyle you=ve worked hard to build. ;ife

premiums are determined by your age and mortgage balance on the date

of application. The younger you are, the less you pay.

4cotia ortgage $ritical Illness $overage

It to help you take your mind off money worries and focus on getting

better, $ritical Illness coverage can pay off your mortgage should you be

diagnosed with a covered illnessG .

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• 8eart Attack

• 4troke

• $ancer

4cotia ortgage -isability $overage

A helping hand when you need it the most sudden disability can make

your mortgage payments a financial burden for both you and your family

at a time when they can least afford it. Jith -isability Insurance, you can

be sure that your mortgage payments are covered if you are disabled by a

covered medical condition.

4cotia ortgage -isability Insurance canG

• $over your mortgage payments (after a * day waiting Beriod from

the day ?3E Jere diagnosed) should you be unable to work as a

result of an inCury or covered impairment, and

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• Brovide a maimum monthly benefit amount of Q%,6** plus your

disability premium (including provincial sales ta) for your

mortgage for up to a maimum of 5 months.

FINDIN&S

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9Sets o, uestions +ere as*ed - t#e -an* !ana$er o, 2 di,,erent

-an*s and accordin$l a report +as prepared o, t#e sa!e +#ic# as

,ollo+:

Response ,ro! %r. A-#is#e* Uppal 5ranc# !ana$er ota*

%a#indra 5an* 9Nerul:

• Fotak ahindra provides both general and life insurance products.

• The policy of mortgage insurance covers life as well as property of the

insured.

• Jhen the policy is issued based on property, valuation of the property

and loan amount is done.

• Fotak ahindra provides better rate then other bank.

• ortgage insurance is an optional coverage.

• The age criteria are %616*.

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• ?es mortgage insurance can be cancelled based on insured interest.

• +isk coverage in Fotak ahindra is moderate

• ortgage insurance being new concept not that famous, it does not

bring on more revenue.

• Indian mortgage insurance is still growing due to the needs and wants

of the customer.

Response ,ro! %r. S#ra0an S#ar!a Sales O,,icer 9!ort$a$e: ICICI

5AN 9Nerul:

• I$I$I mortgage insurance deals with both life and general insurance

• ortgage insurance is basically based on the need purpose of

customer and #I is decided

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• >o additional chargers applied for additional services.

• Age criteria are between 61* yrs.

ICICI 8O%5ARD &ENERA8 INSURANCE

• $overage up to 2* years for only structure, 6 years for only contents

and 6 years for structure K content.

• $over against Dire and allied perils, &urglary K Theft and 3ptional

cover for Terrorism and Additional epenses of rent for altemativeaccommodation.

• any banks that provide home loans and even home insurance because

of their tie1ups with many other general insurance companies. this

option has become a compulsion in many countries, because such a

combination of home loan with home insurance provides enough cover

to the insured.

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• This policy also covers in times of earthquake, loss of property or

damage to the building andor any of its contents.

I$I$I B+E-#>TIA; ;ID# I>4E+A>$#

• 3n the death of the life assured, the benefit based on the initial loan

schedule will be payable. in case of a co1applicant, coverage will beon both lives, if both are earning members. on the first death of any

one of the life assured, the then applicable sum assured will be paid.

Thereafter, the cover ends and no further benefit is payable1

•

In case of any unfortunate incident, the outstanding balance will be paid to the bank and the remaining amount will be paid to your

family.

• 4urrenders will be payable only in case of full prepayment or

balance transfer of the loan.

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CONC8USION

ortgage 8ome Insurance is increasingly becoming popular in the Indian

mortgage industry. ortgage insurance is special type of insurance that

guarantees repayment in the event of demise or disability of the borrower.

The tenure of such a policy is usually 2 months, but can be longer in

some cases.

The prescription for a strong, stable housing market is clearG a return to

fundamentals. Brivate mortgage insurance is the natural vehicle for insuring loans because of its strong, well1established regulatory structure

that has worked for nearly five decades. ortgage insurers have a focused

knowledge of the industry and repeatedly have shown the value of their

products. Although mortgage insurance is principally designed to protect

the lenders and investors, the reality is that the insurers act as an

independent thirdparty with a vested interest in the loan0s performance

and, therefore, are also aligned with investors and the borrower. As such,

the insurer0s independence in approving underwriting guidelines from the

lender plays a vital role in fostering a healthy housing market and

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protecting the financial system. The return to a vibrant housing market

requires sound and rigorous lending standards, accurate

ortgage protection insurance is a life insurance policy which pays of

ortgage following the death of one or more covered individuals. The

primary purposes of this type of insurance coverage are making an

important commitment to their families.

Brivate mortgage insurance is needed now more than ever. Dor a brief

name lenders were starting to offer mortgage above


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ANNEURE

-oes your bank provide mortgage insurance

Jhat kind of mortgage insurance does your bank provide

Jhat all is covered under this mortgage insurance policy

Jhat are the procedures involved in this

Jhat are the additional services that you provide to your customer

Is mortgage insurance a condition of getting the mortgage or is it an

optional coverage

Is there any age criteria

$an the mortgage insurance policy be cancelled

Is the risk coverage very high 8ow do maintain it

-o you think mortgage insurance policy generate more revenue and

attract more customers

Jhat are your thoughts and opinions regarding Indian mortgage

insurance

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5I58IO&RAPH

J#&4IT#4

www.moneycontrol.com

www.economicwelfare.com

www.bis.org www.irda.org

www.mortgageinsurance.com

www.pmi1us.com
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