Who provides Lenders Mortgage Insurance?

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curious_turtle
Posts: 37
Joined: Tue Dec 11, 2012 4:05 pm

Who provides Lenders Mortgage Insurance?

Post by curious_turtle »

Hey Brokers!

I am a graduate student with a major in Banking. For an assignment, I am researching on the Australian Home Loan Industry. While reading through various articles, I often stumbled on to the term LMI.

Upon further research, I found out that it is a one time premium paid by the lenders to the issuer of LMI who in turn will protect the lenders if the borrower defaults on his/her commitments . My question is who are these issuers?

The closest I can relate to them from the theory I have learned are the "Asset Management Companies (AMCs)". Do I understand this correctly? Please help.

Thanks in Advance

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Otto Dargan
Mortgage Specialist
Posts: 7730
Joined: Sat Sep 06, 2008 5:55 pm
Location: Sydney, Australia
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Re: Who provides Lenders Mortgage Insurance?

Post by Otto Dargan »

Hey Mate!

As you must be aware Lender Mortgage Insurance (LMI) is a one time premium paid by the lender to the insurer when a loan is considered risky; ie, Loan to Value ratio (LVR or called LTV in the US) more than 80% with normal loans and 60% with low doc ones. Lenders will just pass this cost on to the borrower, so the borrower will end up paying this. One can always have an option to capitalize it or not though.

Some non-bank lenders however may require LMI premiums to be paid for any purchase regardless of LVR or the loan amount. You can read more about this in our LMI page.

There are basically two big mortgage insurers in Australia: Genworth and QBE. Many large Australian banks can also approve the LMI themselves without referring the applications to these insurers. This is called Delegated Underwriting Authority (DUA).

Asset Management and AMCs are very different to the Lenders Mortgage Insurers. In theory both of these financial instruments are developed to protect lenders in case of default. AMCs however seek to buy/acquire the defaulted security; LMIs on the other hand only pay for the losses to the lenders in an event of default.

I am aware that Asset Management companies are very active in growing economies like China and their banking policies require them to have such institutions there. However, here in Australia because the risk management among the lenders (both bank and non-bank) is pretty solid, such institutions have not propped up yet.

Hopefully this answers your query. Good Luck with your studies. ☺
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

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