Almost “Riskless and Costless” Lending
“Insured mortgage lending is almost riskless and costless to lenders.”—Finn Poschmann (Source)
This statement implies that lenders are getting a free lunch off the taxpayer’s back…that lenders reap all the profits and offload almost all their risk to unsuspecting Joe Sixpack and Grandma Millie.
Let’s examine that for a brief moment.
In the first place, describing insured lending as “costless” is as amusing as it is perplexing. It’s quite difficult to launch and operate a successful underwriting and mortgage funding operation without:
A multi-million dollar upfront investment (sourced by people who expect to see their money back).
Significant capital (to be an insurer-approved lender, MBS/CMB participant, etc.).
Highly experienced personnel (with good reputations).
Such expenses become prohibitive if your arrears are abnormal and you get banned from securitizing (selling) your mortgages.
And riskless? Finn, if you want to see how riskless insured lending is, try:
a) starting a lender
b) underwriting poorly
c) incurring excess defaults
d) getting shut off by the insurers
e) going out of business and losing all or most of your capital.
Then write another column about how riskless your lender experience was.
Lenders have no shortage of incentive to manage exposure, keep lending and stay solvent—mortgage insurance or not.
See related: Skin in the Game
Rob McLister, CMT