Australian Broker forum is the place for positive industry interaction and welcomes your professional and informed opinion.

LMI needs fair play and full disclosure, says industry figure

Notify me of new replies via email
Australian Broker | 23 Apr 2013, 08:00 AM Agree 0
An industry leader has claimed LMI isn't playing by the rules of other insurance products, and has called for full disclosure to consumers
  • James | 23 Apr 2013, 10:38 AM Agree 0
    Absolutely agree with this. Mortgage Insurers seem to get away with so much. There is no open disclosure to clients even though they pay a huge premium for the insurance. The politicians should really place a priority on investigating this side of the finance industry.
  • AaronG | 23 Apr 2013, 10:47 AM Agree 0
    Another bout of regulation? Is this what we really need? How will brokers being forced to print PDS forms for LMI improve the process? In the end, any regulation means fewer approvals as regulation hounds forget that you simply can't force a business to do business with a customer. When you do this, you get the GFC as a result. It always amazes me that brokers insist on putting shackles on themselves. they think those shackles are going on the lender or the insurer, but they always just mean less choices for customers and less business written. When the NCCP came through and got rid of maybe 20% of the loans available, no replacement set of loans became available. There were just fewer choices. The idea that all customers are stupid, so they need protecting from themselves is tired and insulting.
    No one is entitled to LMI, so if you don't like it, save more money. If you do like it and you think they make great money, buy stock in their company.
  • Shane | 23 Apr 2013, 10:51 AM Agree 0
    As LMI offers no refunds after 2 years it needs to be made fully portable within the finance industry. Non portability of LMI remains one of the biggest barriers to refinancing of high LVR customers to another funder at a lower rate. They lose all the benefit of a lower interest rate by having to pay LMI once again on an existing debt that was previously covered by LMI.
  • Craig Mackenzie | 23 Apr 2013, 10:57 AM Agree 0
    Peter - you have been banging this drum for a long time. If you are going to accuse the LMIs of not being an insurance product and not complying with the Insurance Act (which would be news to APRA), I suggest you do your homework first and get some decent legal advice. I understand your point about consumer transparency, but you really don't know what you are talking about in referencing PDSs and insurance legislation.
  • Ian | 23 Apr 2013, 10:58 AM Agree 0
    There is also no disclosure in the loan contracts of the commissions paid by the insurers to the banks, surely that goes against NCCP.
  • Scott Beattie | 23 Apr 2013, 11:00 AM Agree 0
    How can MI be portable unless the risk exposure is exactly the same (ie LVR, postcode, loan amount, full doc / low doc etc etc)
    However, like if you have a car, sell it and buy another, you only pay an increase as the premium carries forward for the previous car - that would make sense - but you can't expect LMI to transfer from funder to funder when they have differing premiums (ie if they only use 1 or both insurers and also the volume of business that they put through)
    PS - I don't work for any MI (nor ever have)

    Scott Beattie
    Cube Central
  • Country Broker | 23 Apr 2013, 11:00 AM Agree 0
    This is spot on , what is really needed if for the Federal Goverment to re-enter this market as they can , will they -No . Peter White is really doing the job here ( non FBAA member) , Ther MFAA need to become involved as well and the FEDERAL MINISTERS or the INCOMING MINISTERS need to be lobbied about the above, portability when a deal is being refinanced ( the risk is NO different , same borrowers, same property , may need a revaluation. and also creating some competition. THe old HLIC didi that and created real opportuntunities for many First home buyers . In Regards to a PDF hard as the insured party is the lender !! More information could be avaliable from each lender and be supplied with loan documents .
  • Rach | 23 Apr 2013, 11:18 AM Agree 0
    On portability, if there is for example a simple dollar for dollar refinance between 2 lenders who utilise the same Morgtgae Insurer, where the security and debt and customer's financail position is essentially the same as the inital risk, then surely there has to be an argument that the full premium is not payable again ? There must be some sort of portability credit that can be sorted out for these simple refinances?
  • NoTimeLikeTheFuture | 23 Apr 2013, 11:23 AM Agree 0
    LMI is essentially a bank fee paid to a third party. It's face saving for the bank.

    When banks 'self insure' it's correctly called something like Reduced Equity 'FEE'.

    People hate bank fees more than they hate insurance - hence 'LMI'.

    It's a cosy little arrangement, everyone is making money and the borrower feels less shafted than they really are.

  • Country Broker | 23 Apr 2013, 11:24 AM Agree 0
    To ArronG , good comments except the two LMI insurers in Australia are not publicly listed , you can by shares in one Australian Parent ,QBE / IAG
  • Jim W | 23 Apr 2013, 11:29 AM Agree 0
    Good article, the writer the makes the points that many consumers raise.
    However it is the Banks that are insured, not the consumer. The consumer is entitled to nothing from the Insurer. The Banks just make the consumer pay the premium. I suggest we have the Banks pay their own premium, of course they would then raise the rates for loans in excess of 75%- 80% lending ratio.
  • Boomerj | 23 Apr 2013, 11:29 AM Agree 0
    Why cant the LMI be linked with the security. Then the only risk is the change of the debt held against the security (per client of course).
    If a client borrows more against the value of the property (during a refi for example) then LMI can ask for a "top up", not a complete premium.
  • Stephen Dinte | 23 Apr 2013, 11:35 AM Agree 0
    For all those who knock our associations, here is another example of what is being done to help make our industry better. The FBAA, led by Peter, is chipping away at an issue that has been a barrier for too long, and it is hoped that real change will be achieved in the near future. We all acknowledge that MI is an important part of our industry, however we would like to see improvements that would benefit our clients. Fully agree with the sentiments expressed by Country Broker.
  • Maria Rigoni | 23 Apr 2013, 11:37 AM Agree 0
    LMI is Lender Mortgage Insurance not borrower mortgage insurance. The lender premium is paid by the borrower. The lender gets protection against repayment default.
    The premiums are outrageous and why would any bank care? They do not pay the premium and they get protection.
    The policy is not transferable as the lender is being insured not the borrower. Each lender has their own credit risk history based on their portfolio of borrowers and past default record reflecting lending policy and hungry approval decisions.

  • Shane | 23 Apr 2013, 11:44 AM Agree 0
    As LMI offers no refunds after 2 years it needs to be made fully portable within the finance industry. Non portability of LMI remains one of the biggest barriers to refinancing of high LVR customers to another funder at a lower rate. They lose all the benefit of a lower interest rate by having to pay LMI once again on an existing debt that was previously covered by LMI.
  • JohnW | 23 Apr 2013, 12:02 PM Agree 0
    @AaronG Totally agree.

    More legislation is exactly what we don't need. More paperwork.

    At the end of the day, if you make LMI cheaper for some, it becomes more expensive for others. Just shifting the costs to someone else (most likely everyone).

    Careful what you wish for.

  • Tony | 23 Apr 2013, 12:20 PM Agree 0
    Can anyone tell me why the LMI premiums are paid up from inception? Why aren't they paid monthly or annually as per other normal insurance premiums or loan repayments? This would then remove the issue of portability. Just take a fresh policy and continue paying instalments.
  • 1martym1 | 23 Apr 2013, 12:27 PM Agree 0
    I am all for new entrants for LMI competition but I don't think it can be legislated to become portable unless the whole concept changes to become a mandatory protection for the borrower not the lender. And who ever is the lender is covered as the borrower has taken out LMI cover. Not sure how you would process that though!
  • Ray | 23 Apr 2013, 01:20 PM Agree 0
    Is LMI refundable? I settled a loan and sold the property a week later and paid the full LMI premium. I asked CBA and they said I could not get any back. Please advise if this is wrong.
  • Patrick | 23 Apr 2013, 01:47 PM Agree 0
    There is a lack of understanding about LMI. Banks can lend more than 80%, but if they do the loan is risk weighted 100% (8% capital required) rather than 50% (4% capital required). So if the return on capital for a home loan portfolio is a net interest margin of 2%, to get the same return on a 100% risk weighted loan would require the interest rate to be 2% higher. This is far more expensive than a once only premium of 2-3%. In my view it just could be that our lenders and LMI providers are little lazy. Surely they could write high LVR loans as a two tier product, a first mortgage up to 80% LVR and a second mortgage up to a further 15% (total 95%) LVR. First tier loans could be interest only for 10 years and second tier loans fully amortised over 10 years. If the rate payable by the borrower was appropriately higher on these second tier loans and the lender either carried the risk on balance sheet (large banks with more significant risk pooling available) or purchased "top 20%" LMI and paid their own premium out of the additional margin with that premium being an annual % charge on their whole tier two portfolio balance outstanding (smaller and/or securitised lenders) we would have a package that did not need to be transferable and the LMI on individual loans would simply terminate with discharge. LMI providers prefer a once only lump sum premium as it eliminates the credit risk in relation to revenue contribution to the underwriting pool. If the premium was payable by the bank this risk is transferred to the bank and is recovered as part of the higher net interest margin which in turn is of course insured against default on a pooled basis.
  • Brado | 23 Apr 2013, 01:58 PM Agree 0
    How do we know that the banks don't already get the LMI premium refunded ...but keep it for themselves? Makes a lost loan from a refinance look a bit better doesn't it?
  • RC | 23 Apr 2013, 01:58 PM Agree 0
    Tony your comment about why LMI is paid upfront. Valid point, but the LMI insurer wants thier grab upfront, plus from a serviceability and cost aspect, does a client want to be paying an additional monthly cost over a three to five year period, as I can insure you, (excuse the pun) that the LMI insurer, would not want it over any longer a period, as the loan is more than likely non-existant with that funder by then. The shoe is than on the other foot. The insurer, if their is outstanding premium, what addtional issues or compliance or liability does that introduce.

    But I like your thinking.
  • Positive Broker | 23 Apr 2013, 02:35 PM Agree 0
    Be careful, what you wish for.

    I see three problems here. 1. We don't need more regulation and paperwork.
    2. The policy covers the lender. I don't see how this could be portable if the insured is changing. 3. If there were no LMI, there would be NO loans above 80% LVR and NO Non Bank Lenders.

    I for one fully explain to my clients how LMI works so disclosure is up to me. I guess I'm lucky I have an LMI background so I am comfortable explaining the details and the benefits.
  • alex | 23 Apr 2013, 04:53 PM Agree 0
    no one should need to pay LMI guys, it's just a cost that no one needs. the only people who make money is the insuance companys and the banks , and yes you can claim LMI back from the bank
  • Allan Faint | 24 Apr 2013, 10:55 AM Agree 0
    recently advised a client to request a refund on LMI paid 12 months ago. they were told refunds are no longer possible, I told them to go to the ombudsman am waiting to hear the outcome.
  • Tim | 24 Apr 2013, 11:19 AM Agree 0
    Making LMI fairer is a simple exercise if common sense were to prevail. The LMI policy covers a loan for say 30 years. If a loan is paid out then a refund of part of the premium should be mandatory and not optional for the insurer.
    The mortgage insurer could charge a fair amount for administration costs and then the premium on top of this. If a loan is repaid they keep the administration fee and the premium could be divided by the loan term and refunded accordingly. eg: a 30 year loan is repaid after 10 years then the refund would be the premium less 1/3rd.
    I know there will be people saying what is a fair administration fee and that would be for the LMI companies to decide but this model would see clients receiving some compensation for unused insurance.
  • OzBoy | 25 Apr 2013, 10:16 AM Agree 0
    LMI is not a 30 year coverage. It covers shortfalls after a sale. Depending on market conditions etc the MI can be in red for a couple of years or more, hence premium increases as the LVR goes up. Hope you find this helpful.
Post a reply