MI Cure Improvement Likely Temporary, Analysts Predict
Modest improvement reported in the cure rate for home loans with mortgage insurance is likely temporary, according to analysts at Friedman Billings Ramsey.
The analysts believe the underlying home loan credit trends remain negative for the mortgage insurance industry. Moreover, they are skeptical of the notion that MI companies will benefit from loan modifications designed to avert foreclosure.
Citing data compiled by the Mortgage Insurance Cos. of America, FBR analysts Steve Stelmach and Paul Miller wrote in a recent research note that the August improvement may be an aberration in the trend toward greater defaults relative to cures, which translates into deterioration in home loan credit quality.
"The monthly improvement belies the longer-term trend," they wrote.
"We expect cure ratios will continue to weaken as we enter the seasonally weak months of the year."
The industry does benefit from the longer-term trend of higher insurance-in-force, but the benefits of that growth won't start to bolster the performance of mortgage insurance companies until the second half of 2008, the analysts believe.
"We remain cautious on the space given the significant credit headwinds, but for long-term investors (with time horizons beyond the next year) it may be time to start doing dome homework on the space, as current valuations could prove attractive once we get beyond the current credit squeeze," the stock analysts said.
Moreover, FBR does not expect MI companies to benefit much from the loan modifications being promoted as a way for servicers to minimize foreclosures. FBR said that "anecdotal evidence" suggests that servicers are more aggressively trying to modify loans without mortgage insurance than loans that do have coverage, since the presence of the mortgage insurance mitigates risk to the lender anyway.
"In the current market, servicers' capacity is likely strained, so they are likely to focus efforts on areas where modifications can have the greatest benefit to both lender and borrower until capacity is freed up," the FBR report said.
FBR also noted that some legislative proposals floating around in the nation's capital could affect the MI industry.
Those proposals include legislation that might expand the Federal Housing Administration, a public sector program that competes with private mortgage insurance for lower balance loans and first-time homebuyers.
Another proposal would allow the government-sponsored enterprises to buy home loans with only a 10% downpayment without the presence of mortgage insurance, instead of the usual 20% downpayment requirement. Treasury secretary Henry Paulson made the latter suggestion in recent testimony before a congressional panel.
Month Cures Defaults Ratio
June '07 29,336 52,888 55.5%
July '07 30,567 57,219 53.4%
August '07 33,811 58,441 57.9%
Source: MICA. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/