Like other debt instruments, residential mortgages involve credit risk. That risk arises from uncertainty over whether the borrower will perform as required by the mortgage document. Mortgage insurance provides protection against the losses created by mortgage defaults. Most mortgage insurance covers individual loans, although lenders or other investors may purchase pool policies, which protect against losses on groups of loans. The current crisis in the U.S. housing and mortgage markets has imposed large losses on the private mortgage insurance (MI) industry, which specializes in insuring conventional single-family mortgages with loan-to-value (LTV) ratios above 80 percent.
This Mortgage Market Note discusses the evolution of residential mortgage insurance in the U.S., explores recent mortgage insurance trends, reviews how Fannie Mae and Freddie Mac (the Enterprises) use private MI, and discusses the current state of the private MI industry and its need for additional capital to support new mortgage lending.