Mortgage insurance

Mortgage insurance is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer. The policy is also known as a mortgage indemnity guarantee (MIG), particularly in the UK.

For example, suppose Mr. Smith decides to purchase a house which costs $150,000. He pays 10% ($15,000) down payment and takes out a $135,000 ($150,000-$15,000) mortgage on the remaining 90%. Lenders will often require mortgage insurance for mortgage loans which exceed 80% (the typical cut-off) of the property's sale price. Because of his limited equity, the lender requires that Mr. Smith pay for mortgage insurance that protects the lender against his default. The lender then requires the mortgage insurer to provide insurance coverage at, for example, 25% of the 135,000, or $33,750, leaving the lender with an exposure of $101,250. The mortgage insurer will charge a premium for this coverage, which may be paid by either the borrower or the lender. If the borrower defaults and the property is sold at a loss, the insurer will cover the first $33,750 of losses. Coverages offered by mortgage insurers can vary from 20% to 50% and higher.

To obtain public mortgage insurance from the Federal Housing Administration in the United States, Mr. Smith must pay a mortgage insurance premium (MIP) equal to 1 percent of the loan amount at closing. This premium is normally financed by the lender and paid to FHA on the borrower's behalf. Depending on the loan-to-value ratio, there may be a monthly premium as well. The United States Veterans Administration also offers insurance on mortgages.

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Bond insurance

Bond insurance is a service whereby issuers of a bond can pay a premium to a third party, who will provide interest and capital repayments as specified in the bond in the event of the failure of the issuer to do so. The effect of this is to raise the rating of the bond to the rating of the insurer; accordingly, a bond insurer's credit rating must be almost perfect.

The premium requested for insurance on a bond is a measure of the perceived risk of failure of the issuer.

The economic value of bond insurance to the governmental unit, agency, or company offering bonds is a saving in interest costs reflecting the difference in yield on an insured bond from that on the same bond if uninsured. Insured securities ranged from municipal bonds and structured finance bonds to collateralized debt obligations (CDOs) domestically and abroad.

National government bonds are almost never insured because governments can print money. In fact, for this reason, securities that are tied to or backed by government bonds are typically considered by ratings agencies to be high grade.

Municipal government bonds were insured by the so-called monolines starting in the 1970s. The financial crisis of 2008 seriously harmed their business model, to the point where their continued existence is in doubt.

Bond insurers are also called "financial guaranty insurance companies" or "financial guarantors".

Companies whose sole line of business is to provide bond insurance services to one industry are called monoline insurers. The term 'monoline' eventually became synonymous in some literature with terms like 'financial guarantors', and 'municipal bond insurers'.

Bonds which are insured by these companies are sometimes said to be 'wrapped' by the insurer.

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