Choice, Capital and Competition: Private Mortgage Insurance Application and Availability

The financial health of the mortgage insurance industry is vital for the flow of mortgage credit to low wealth borrowers. Private mortgage insurance competes with insurance offered through the federal government, particularly the Federal Housing Administration. This paper employs a Heckman selection model and a database of mortgage insurance applications to examine the impact of capital reserves and federal competition on the credit decisions of private mortgage insurance companies while accounting for applicants’ decisions to seek private insurance. We find private insurers became more likely to deny applications as their capital ratios fell during the Great Recession. However, loans eligible for insurance through the Federal Housing Administration were less likely to be denied than higher loan amounts. These findings are important for understanding how the conventional mortgage market, including government-sponsored enterprises, functions through a severe housing crisis