Fitch: Mortgage Insurance Exposure to Credit Risk Grows

While the market has worried about the performance of subprime loans originated in 2006, analysts at Fitch Ratings say the concerns may extend to earlier origination vintages as well.

And that will put continued pressure on the mortgage insurance industry, which provides first-loss coverage on low-downpayment loans. The MI firms are particularly vulnerable if problems in the subprime sector spill over into higher-credit-quality segments of the market, which comprises the bulk of the loans with MI coverage. Fitch analysts told MSN that they do not yet see any real evidence that major credit deterioration is seeping up into the prime and near-prime credit spectrum. But the more the weakness in the housing environment persists, the greater the likelihood that subprime problems could seep into other parts of the market, said Thomas Abruzzo, one of the Fitch analysts who worked on the report.

Fitch predicts that the mortgage insurers will see losses rise from the historically low levels of recent years, reflecting higher overall delinquency rates for recent vintages, fewer refinancing opportunities for troubled borrowers, diminished home-equity buildup and higher average loan balances.

Fitch said it believes the industry will be able to manage these difficulties without rating implications "over the intermediate term," but said some companies may be better positioned to weather the storm than others.

"A lot of it is going to do with what kind of credit the companies exposed themselves to," Mr. Abruzzo said.

He said the firms with the least exposure to nontraditional products might be best prepared to weather the storm.

The rating agency noted that as an industry, borrowers with FICO scores below 629 only account for about 13% of mortgage insurance business.

Because the MI's exposure to the weakest part of the credit spectrum is limited, Fitch said that the degree to which the industry faces higher losses depends largely on the performance of loans to middle and higher credit score borrowers.

But about 47% of the industry's insurance-in-force from the troubled 2006 vintage consisted of loans with less than a 10% downpayment, Fitch noted.

One worry for the industry: risk layering. Fitch noted that much of the industry's coverage for loans originated in 2005 and 2006 consists of loans that combine low or no borrower FICO scores with loan-to-value ratios above 90%. On the positive side, these loans that combine all three traits - recent vintages, low or no credit scores, and high LTVs - only account for about 4% of the industry's outstanding insurance.

The performance of middle and higher credit score loans will have a bigger impact on the industry. Fitch said there is concern that some of these loans involved borrowers whose income or assets were not fully documented as well as adjustable-rate loans that will see payments rise substantially.

Fitch also noted that the industry benefits from some side effects of the housing slowdown, including the tightening of loan underwriting standards, rising demand for mortgage insurance and regulatory moves to encourage loss-mitigation solutions that avert foreclosure.

Snapshot: Challenges facing mi industry

* Higher Delinquencies

* Fewer Refinancing Opportunities

* Higher Average Loan Balances

Source: Fitch

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