Shunning mortgage financing — Implications for Insurance

Worrisome: Banks Backing Out on Mortgage Facilities. NEWS that 12 out of the 31 commercial banks in the country do not offer mortgage loans to customers is quite worrying.

It is worrisome, not only to mortgage insurance but also a threat to our already widening housing deficit.

In the Graphic Business issue of February 28 – March 6, 2017, in a story titled ‘12 Banks shun mortgage financing’, it was stated that the BoG data at the time quoted the average interest rate on mortgage loans at 33.3 per cent.

The housing deficit which is said to be widening, according to the write-up, is worrying, especially for those in the low to middle income bracket of the economy with only fewer mortgage products which are, by far, quite expensive.

Increased life expectancy

Life expectancy among Ghanaians is said to have increased to 61.0 for males and 63.1 for females (WHO data-2015). Much as this sounds refreshing to know, this does not necessarily suggest that not many working persons are dying much younger than expected.

As this may affect the demand for some forms of insurance, it does not take away the fact that the risk management mechanisms of, especially, lending institutions, should be taken for granted. This even calls for a tighter adherence to ensure that such lending institutions remain firmly in business as life goes on!

That notwithstanding, it will not augur well for us, if a good number of the banks in Ghana are becoming extremely rigid in the offering of facilities that will make accommodation life easier for their customers, especially those in the low to middle income bracket.

Owning a house

Owning a home is one of man’s biggest desires, but only a few people are able to acquire their own. With the ever growing middle class in our society [who are particularly minded about their independence and the need to build a successful family], owning a house through mortgage from financial institutions (e.g., commercial banks) has gained some popularity among Ghanaian workers. Indeed, it is one of the safest ways to acquire a house, considering the many land litigations often associated with building a house on one’s own.

However, most of these commercial banks typically require mortgage insurance, as a prerequisite for granting a mortgage facility. Because such facilities often span between 10-35 years – which may be the entire working life of the borrower, it is associated with a number of risks (e.g., borrowers’ death, incapacitation or job loss). A classical example is having a family ejected from their homes after their breadwinner fails to continue to repay his or her mortgage facilities as a result of job loss, death or incapacitation. These associated risks, therefore, engenders the need for mortgage insurance.

Mortgage insurance (MI)

MI, also referred to as mortgage guarantee, home-loan insurance or mortgage indemnity guarantee, is an insurance policy that provides compensation to lending institutions for losses arising from the default of a mortgage loan. MI may be public or private, depending on the particular insurer. Typically, MI reimburses the lending institution in the event of default resulting from death, incapacitation, etc. The borrower pays the premium, often referred to as Private Mortgage Insurance (PMI), but these premiums may vary depending on the advance payment.

The nature of who pays the premium will largely depend on who is taking the policy; i.e., the borrower or the lender.

Borrower-paid private mortgage insurance (BPMI) or "Traditional Mortgage insurance" is default insurance on mortgage loans provided by insurers and paid for by borrowers.

The lender-paid private mortgage insurance (LPMI) is similar to BPMI except that it is paid for by the lender, and the borrower is often unaware of its existence. The cost of the premium is usually built into the interest rate charged on the loan.

How MI works

Just like any other forms of insurance transaction, in mortgage insurance, a policy document is issued to a lending institution, a commercial bank or other mortgage-holding entity, detailing the terms and conditions of the coverage. The policy document often contains client-specific information and general conditions such as exclusions (e.g., suicide clauses), conditions for notification of loans in default, and claims settlement. Depending on the mortgage value, however, some insurance underwriters may require a medical report of the borrower.

Jurisdictional differences

Notwithstanding that, MI operates differently in different countries, the indemnity principle remains the same. For instance, whereas in Australia borrowers pay over 80per cent of the purchase price for Lenders Mortgage Insurance (LMI) for home loans, in Singapore, it is mandatory for flats owners to have a mortgage insurance if they are using the balance in their Provident Fund accounts to pay for the monthly mortgage installment. It is, however, optional for owners of private homes in Singapore to take mortgage insurance. Meanwhile, in the United States, private mortgage insurance is typically required when down payments are below 20 per cent.

Rating

Essentially, factors such as the value of the loan insured, loan-to-value (LTV) or the proposer’s credit profile are often taken into consideration when rating a mortgage risk. Rates can range from 0.32per cent to 1.20per cent of the principal loan amount and premiums may be paid in a single lump sum, annually, monthly, or a combination of the two.

Challenges

In all of this, the quest to circumvent the underwriting processes by some unscrupulous borrowers may have to be contended with, as some would-be borrowers may want to conceal their deteriorating health statuses in order to exploit the processes. It must, however, be emphasised that providing appropriate health and other personal details helps in the determination of appropriate premiums at inception.