For decades after the Depression wiped out the loosely run mortgage-guaranty companies that flourished in the '20s, the Federal Government was the only source of insurance for home loans, chiefly through the Federal Housing Administration. Today, seven private companies are successfully challenging that monopoly. The oldest and by far the largest, Milwaukee-based Mortgage Guaranty Insurance Corp., has not only grown into a thriving concern with $50 million of assets and $3.5 billion of insurance in force, but has also spread its operations into 46 states, the District of Columbia, Canada and Australia.
That comeback by private enterprise is particularly impressive because, in the best of circumstances, it is virtually impossible for private business to gain a foothold in a field totally dominated by the Federal Government. In this case, the biggest part of the job was to beat the red-tape-ridden FHA at its own game. The door to competition was opened by FHA's rigid 6% ceiling on interest rates, which President Johnson last week asked Congress to abolish. In recurrent periods of tight money, banks and other lenders have increasingly shunned FHA and Veterans Administration loans to get higher interest rates on conventional mortgages. M.G.I.C. and other private firms not only approve any interest rate agreeable to both lender and borrower but have also devised faster and cheaper ways to operate. While FHA generally takes nearly two weeks to pass on an application for home-loan insurance, M.G.I.C. makes up its mind in 24 hours, charges only about half of FHA's costly ½%-per-year premium on the declining balance of loans.
Screened Risks. That combination has proved so enticing to savings and loan associations, the largest single source of housing credit, that last year they did twice as much business with M.G.I.C. ($860 million) as with the FHA. Unlike the FHA, the Milwaukee firm relies on its 4,500 lender-customers to appraise the value of property it insures, screens out bad risks by spot checks. The company concentrates on loans for city and suburban one-family homes, generally insists on at least a 10% down payment. As a result, its foreclosure rate runs about half that of the FHA, which backs loans made on a mere 3% down payment, and the VA, which guarantees loans with no down payment at all.
M.G.I.C. was founded eleven years ago by its president, Milwaukee Real Estate Lawyer Max H. Karl, now 58. At first it looked like a suicidal venture. Many insured loans, notably those on apartments and unsold new homes, proved to be overly speculative; more important, M.G.I.C. was not yet insisting—as it now does—on writing all policies with an option permitting it to pay only 20% of a claim in cash while leaving the mortgage lender to take over foreclosed property. Allowed initially to operate only in Wisconsin, Illinois and Minnesota, M.G.I.C. lost $64,000 in its first year. In 1959, Karl shrewdly tied his fortunes to those of S & Ls, which had just won authority to make loans up to 90% of the cost of a house but were often hesitant to take such a risk. To make sure that S & Ls got the message, Karl soon persuaded eight elder statesmen of the industry to join his board of directors. M.G.I.C.'s profits have climbed steadily ever since, reaching $4,200,000 last year even though M.G.I.C. sets aside half its income from premiums as loss reserves.