One Bad Vintage Represents 30% of MI in Force

New York-The outlook for private mortgage insurers for 2009 remains negative as they will have to deal with loans they underwrote in 2007, a report from Fitch Ratings here declares. The 2007 vintage, "a low point in mortgage underwriting discipline," the rating agency said, represents 30% of the industry's risk-in-force.

Furthermore, the business underwritten in the early part of last year has similar characteristics to that 2007 book and is likely to have a similar performance. The business written in the second half of 2008 is expected to perform better than the first half as a result of tighter underwriting standards.

There will be "continued significant loss development" this year for the MIs as losses are likely to shift from weaker underwriting segments and geographic regions experiencing the most dramatic home price declines to the broader prime market, especially if unemployment rates continue to rise.

Fitch also said capital constraints remain the most acute problem facing the surviving mortgage insurers.

"Mortgage insurers face a real risk of breaching regulatory capital limits, which will likely limit the industry's ability to take advantage of new and potentially more profitable business to offset challenges in legacy portfolios. For certain standalone MIs, holding company liquidity may be at risk from lending covenants tied to net worth and risk-to-capital," said Roger Merritt, Fitch managing director.

The excess of loss captive mortgage reinsurance arrangements, which Fitch noted had once been seen as a drain on the profits of mortgage insurers, are now helping them to mitigate the losses on their book of business. According to Fitch, at the end of the third quarter last year, the private mortgage insurers had an aggregate of $5 billion in trust balances related to captive reinsurance and had recognized approximately $2 billion of captive reinsurance benefit. The rating agency added it expects that the industry will recover a substantial portion of the balances held in trust as the 2006 and 2007 vintages continue to produce substantial losses.

However, all the mortgage insurers have stopped the excess of loss programs. The only reinsurance programs they are participating in are quota share.

A benefit of the 2008 book of business is that the mortgage insurers were able to increase pricing as well as underwriting standards, Fitch said. The older book of business was written in an aggressive pricing environment.

Among the issues facing mortgage insurers in 2009 is the role that the government-sponsored enterprises play in the U.S. mortgage market and how the conservatorship of the GSEs will shape this role.

The GSE question is key because almost the entire industry is operating under a waiver of the standards to be a Type I mortgage insurer.

On the default side, Fitch pointed to the high redefault statistics for loans, which have been modified.

The report said, "While modifications buy MIs some additional time to build capital through new premiums and investment income before paying losses, any redefaults ultimately delay, rather than remove, the pressure on their capital bases.

In addition to remedying stressed loans, Fitch believes that government efforts aimed at stabilizing the wider mortgage market would benefit the mortgage insurance industry by avoiding losses on loans that are currently performing well but could otherwise fall delinquent if poor housing market conditions persist."

Data from the Mortgage Insurance Companies of America have shown an increase in the default to cure ratio.

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