I HAVE BEEN IN THE PRIVATE MORTGAGE INSURANCE (MI) BUSINESS FOR 36 YEARS as an employee and now the chief executive officer of MGIC Investment Corporation, Milwaukee. Like many readers, I have lived through many mortgage credit cycles, regional downturns (the Oil Patch, Southern California, New England) as well as the market, legislative and regulatory changes that have followed.
In each case, the MI industry experienced the building up and drawing down of financial strength as the market expanded and contracted. Being in a first-loss position as a credit enhancer on low-down-payment mortgages puts you squarely in the middle of the action. Should there be any doubt about that, consider this statistic: Since the onset of the housing crisis, our industry has paid more than $50 billion in claims due to the record level of foreclosures that occurred.
The state insurance regulatory framework for MI--created in the late 1950s/early 1960s and codified in the 1970s, when savings-and-loans were the nation's predominant investors in residential mortgage lending--established capital standards that remained unchallenged for decades.
The government-sponsored enterprises (GSEs), with which the MI industry has a symbiotic relationship, emerged in the 1980s and grew stronger and more influential during the 1990s and early 2000s, when they established their own capital standards for the MI industry.
The rating agencies became the standard on which the GSEs relied to validate the capabilities of the MI industry. They were unquestioned in their role as arbiter of our financial strength. Historically, this approach to capital adequacy worked well as prior downturns were dominated by regional, not national, economic events where weak performance in one part of the country could be offset by stronger performance in other parts. However, since the modern MI industry was formed in the 1950s, it was never tested like it was during the recent financial crisis and U.S. housing market downturn.
The financial crisis materially changed this familiar world completely for MGIC and the MI industry. Although delinquencies and defaults were highest in the "Sand States" (i.e., Arizona, California, Florida and Nevada), as the impact of the crisis spread to nearly all sectors of the economy, mortgage performance deteriorated in nearly every state.
The newly established Federal Housing Finance Agency (FHFA) placed the GSEs into conservatorship. Some of our lender customers closed up shop and others required government assistance to stay in business. Mortgage brokers nearly disappeared as an important presence in the market. Rating agency judgments were questioned. And financial and operational stress tested the limits of the MI regulatory framework.
I recount these events for two reasons. First, as I visited Washington, D.C., regularly during the downturn to better understand and communicate what was going on in our industry, I...