The Sunday Telegraph had an interesting story yesterday on rising Lenders Mortgage Insurance (LMI) premiums:
Lenders Mortgage Insurance for a borrower with a typical 10 per cent deposit on a $500,000 property has risen from less than $6000 last year to nearly $9000, a surge of close to 50 per cent according to brokers Home Loan Experts.
In August 2011, then Treasurer Wayne Swan announced the introduction of a one-page fact sheet on LMI. Nearly two years on it still isn’t in place. It is “close” to being in place, according to the office of Assistant Treasurer David Bradbury.
Incredibly, when it is, it won’t even nominate the cost. And it is unlikely to point out that LMI is neither portable nor refundable.
That means any household looking to refinance with another lender faces paying thousands of dollars in LMI for a second time, unless they have at least 20 per cent equity in their home.
Mortgage brokers and consumer groups say this is undermining the Government’s efforts to increase competition in the home-loan market because having to pay LMI again makes switching lenders financially unviable.
There is no great mystery here. LMI returns have been thumped by a persistently higher than usual (though still low) default rate. Genworth, from whom the figures are allegedly drawn, is planning an IPO of the business and is likely trying to fatten the turkey. The story also says that the other major provider, QBELMI, has raised its premiums ahead of inflation:
…a 17 per cent increase since 2010. That means a borrower with a 10 per cent deposit on a $500,000 property would pay an $8505 compared to $7290 three years ago.
These two businesses form a massive duopoly so there’s no competition to prevent premium hikes. Moreover, both are grossly under-capitalised so their cost of funds is higher than it should be which also gets passed on. Then there is the LMI’s “risk-in-force”, which is enormous. Last year Genworth had over $100 billion of exposure and who could blame them for charging a premium giving they carry the entire load of Australia’s potential bad mortgage debt?
To be frank, there’s not much point whining about it. If you hang your financial stability in a highly levered mortgage market upon a structured duopoly of under-capitalised insurers, what do you think is going to happen? It’s a wonder LMI is so cheap.
