Fri | Jun 5, 2020

Cedric Stephens | Mortgage insurance protection in a crisis

Published:Sunday | April 5, 2020 | 12:27 AM

ADVISORY COLUMN: INSURANCE HELPLINE

QUESTION: Does mortgage insurance offer protection to persons who lose their jobs as a result of COVID-19? – P.N., Kingston 8

INSURANCE HELPLINE: When I sat down to reply to your question, the first opening sentence of this paragraph was ‘the short answer to your question is no’. After conducting research and reflecting on this deceptively simple topic, I added the 16 words that now precede them.

Had I continued in that direction, I would have ended up misleading you and other readers.

The correct, second short answer to your timely question, to paraphrase former US President Bill Clinton, is: It depends what you mean by the phrase ‘mortgage insurance’.

Mortgage insurance does not mean the same thing in the United States as it does in Jamaica. The difference in meaning is important for three reasons. This newspaper reaches a global audience. Also, it is not uncommon to find Jamaicans who own real estate in both countries. Third, I try to offer accurate information and advice. Because I am ignorant about which of the two groups of readers to which you belong, I will answer the question from the two angles.

Nerdwallet, a financial services company, says: “The traditional target for a home down payment (in the US) is 20 per cent of the purchase price, but that’s out of reach for many buyers. Mortgage insurance makes it possible to hand over a much smaller down payment and still qualify for a home loan. It protects the lender in case you default on the loan.

“With a conventional mortgage – a home loan that isn’t federally guaranteed or insured – a lender will require you to pay for private mortgage insurance, or PMI if you put less than 20 per cent down. With an FHA or USDA loan, (which means it is guaranteed by the federal government), you’ll pay for mortgage insurance regardless of the downpayment amount. Mortgages granted to veterans require a ‘funding fee’, rather than mortgage insurance.

“You (the borrower) bears the cost of mortgage insurance, but it covers the lender. Mortgage insurance pays the lender a portion of the principal in the event you stop making mortgage payments. Meanwhile, you’re still on the hook for the loan if you can’t pay, and you could lose the home in foreclosure if you fall too far behind.”

What mortgage insurance is in the US is clear. However, the definition is not enough. It is unclear whether non-payment caused by an event like the coronavirus would trigger the protection that is afforded the lender. I suspect that it wouldn’t, but I’m not sure.

What is called mortgage insurance in the US is what we in Jamaica label mortgage indemnity insurance. The latter also kicks in to protect the lender. It is triggered when mortgages above a 75 per cent threshold have been granted. Jamaica Mortgage Bank, a government entity, provides mortgage indemnity insurance to local lenders.

Mortgage insurance in a Jamaican context is the property insurance that also protects the lender. It kicks in when the building that is the subject of the mortgage is destroyed or damaged as a result of named events like fire, earthquake, hurricane and flood, et cetera. The inability of the borrower to service the loan due to the loss of a job caused by COVID-19, or for any other reason, is not one of the things covered by the insurance.

Mortgage lenders in Jamaica and other countries use perils or property insurance as one of many tools to protect their mortgage portfolios. Borrowers typically – either knowingly or unknowingly – shoulder the unemployment and other risks.

Many local workers, some of them with mortgages, will lose their jobs as a direct result of the threats posed by the coronavirus and the stringent measures that governments have introduced to combat it. Do these workers have access to unemployment insurance? If they do not, where will they obtain money to meet their day-to-day living expenses, service their mortgages and other loans? Issues like these are implied in the question you asked. The short, simple answers to them are: no and I do not know.

I read on Friday that the governor of Florida issued an order to lenders to extend the period for issuing foreclosures due to the coronavirus.

The International Labour Organization, ILO, conducted a comparative analysis of unemployment insurance (UI) schemes in 24 advanced and emerging economies. It published its findings in a report in October 2019.

The abstract said: “We find that almost all countries complement UI with severance payments, although emerging economies rely relatively more on severance payments. As a result, UI coverage rates are substantially higher in advanced than emerging economies. We also find that most countries finance their UI collectively (that is, by workers, employers and the government), but contribution rates are higher in advanced than emerging economies. Turning to entitlement conditions, UI schemes are generally accessible only by dependent employees and formal sector workers and the stringency of qualifying conditions is similar in advanced and emerging economies. We also find that unemployment benefit generosity (that is, in terms of both benefit level and duration) is higher in advanced than emerging economies.”

COVID-19 is what author and university professor Nassim Taleb describes as a white swan event. That means it would be the opposite of a black swan event, or was predictable. He calls a black swan event unpredictable and “beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterised by their extreme rarity, their severe impact”.

A white swan or black swan event, or whatever, as some persons have dubbed COVID-19, Jamaica does not have a social safety net to protect workers who have lost or will lose their jobs. This explains why one of the government’s responses to the threat of the coronavirus, in the absence of UI, has included an employee support grant to provide help to certain groups of workers who lose their jobs as a result of the economic disruption.

Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: aegis@flowja.com