Central Bank expresses concern about cost of mortgage insurance

A senior economist with the Central Bank has expressed concern about the potential cost of mortgage insurance, warning that it could "act counter" to the recently published restrictions on mortgage lending.

Introducing mortgage insurance into the Irish market has been proposed by financial services providers such as Genworth as a way of allowing homeowners borrow more than the 80 per cent or so of purchase price allowed under the Central Bank’s new rules. Mortgage insurance protects lenders by transferring some or all of the mortgage default risk fromlenders to insurers, thereby reducing the loss to a lender in the event of a default. In the aftermath of the Central Bank’s new rules, Genworth said that it is “reviewing the full details of the proposals”.

“Supporting” the mortgage market

In an economic letter published on Tuesday, Niamh Hallissey, a senior econmist with the Central Bank, said that mortgage insurance can "play a role in supporting a well-functioning mortgage market, for example by diversifying risks and bringing in new sources of capital".

However, she highlighted several areas of concern, including the cost of mortgage insurance, noting that it is difficult to estimate the likely cost “given the lack of scale in the market and the costs of the recent crisis”.

Could be expensive

If the costs of such a product were to be large, it would likely be capitalised onto the mortgage principal. This would thus increase the overall level of mortgage debt, and “act counter to the objective of the macro-prudential measures” the Central Bank said.

Consumer protection issues are another concern, such as ensuring that the pricing of MI is “clear and transparent” and requiring that borrowers can choose which mortgage insurer provides the cover. Another area to be considered is the fact that under most mortgage insurance policies, a claim is not payable until after the borrower has defaulted on their mortgage and the property has been foreclosed and sold.

“This feature of MI would need to be adapted to reflect the nature of the Irish market in this respect,” the Central Bank said.

Who bears the risk is another concern outlined in the letter. From a macro-prudential perspective, Ms Hallissey notes that mortgage insurance does not remove the risk of a systemic crisis, “but shifts this risk from the lenders to the insurers”. If the risk is concentrated in a small number of mortgage insurers, or in a state-owned insurer, this could increase the systemic problems in the underlying market the letter says.

In addition, the Central Bank said that if mortgage insurance was to be introduced, it wold need a “robust prudential framework for the supervision of these companies”.

“ This would involve the development of a specialised micro-prudential framework, which would take some time to put in place and would have to consistent with the new Europe-wide Solvency II framework”.