The efficiency of residential mortgage guarantee insurance markets

Mortgage Guarantee Insurance (MGI) provides protection to lenders against default by borrowers who have less than 20 percent equity interest in the mortgaged property. The existence of this form of insurance helps to stimulate home ownership by allowing consumers with less than twenty percent down payment access to credit markets. Initially an invention of lenders, MGI became dominated by government agencies after the Great Depression but recently private insurers have increased their market share to more than 75 percent. The domination of the industry by the private sector appears not to affirm competition, however. Despite varying loss ratios across states, MGI premiums appear to remain relatively uniform, suggesting price inflexibility. This paper uses cross-sectional data on loss ratio, mortgage delinquency rates, and housing prices to test empirically the level of competition in the MGI industry. The paper finds that the level of competition in the industry is not sufficient to drive the premiums to the competitive (efficient) level. The implication is that national cross subsidies occur where high risk insureds are subsidized by low risk insureds.