Insurance is a business that's all about hedging bets. Not surprisingly, Teresa Bryce Bazemore, president of Radian Guaranty Inc., one of the nation's largest insurers of mortgages, thinks her company's product is a good hedge -- not just for banks, but for the nation, as she explained in my Leadership Agenda interview.
I'll let her explain, but first a definition. Lenders often require home buyers to purchase mortgage insurance when they are putting down less than 20 percent of the house's value. When less than 78 percent of the value of the house remains on the mortgage, buyers can stop paying the insurance after contacting their lender. That's assuming the purchase price represents the value of the house. If the value of the house goes up, the payments can be stopped sooner because the remaining balance on the loan is less than 78 percent of the value of the house. By the way, the insurance protects the lender in the event of a default -- not the buyer.
OK, back to Bazemore:
"You may have some lenders who think it’s a good idea to self-insure," she told me. "The problem is, as an insurance company, we have significant requirements around having reserves. We have to put aside 50 percent of every premium dollar into a contingency reserve fund for 10 years. I call it the rainy day fund. You are essentially putting aside capital, so if there’s a downturn, you have money socked away.