A flattening yield curve is not a threat to mortgage insurers

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Private mortgage insurers are better positioned to weather a flatter or even inverted yield curve than other financials from an investment perspective, a report from FBR Capital Markets said.

The interest rate environment will be increasingly challenging for banks as additional short-term rate hikes by the Federal Open Market Committee are expected in December and during 2018.

"This will drive a change in deposit bases, which combined with our assumption of stable yields on longer-term earning assets, could limit net interest margin expansion and potentially cause NIM compression longer-term," said the report, written by Randy Binner and Weston Bloomer.

"Fortunately, mortgage insurers offer a non-yield curve sensitive way to play good domestic housing trends."

Residential credit trends are expected to remain positive given growing employment and favorable supply and demand dynamics that support home prices. These will benefit the private mortgage insurers, the report said. FBR follows three of the six private mortgage insurers: MGIC Investment Corp., National MI Holdings Inc. and Radian Group.

The three biggest threats to the industry remain competition with the Federal Housing Administration, changes to the secondary market capital requirements and housing finance reform.

While those threats "create a constant wall of worry, we believe the policy backdrop is supportive. Mortgage insurers are not spread-based businesses and do not significantly rely on investment income for earnings. Therefore, they have much lower exposure to a flatter curve compared to most financials," the report said.

Changes in interest rates influence the amount of new insurance written as well as the persistency of current policies, defined as the percentage of the book of business that remains in force one later. However, historically purchase origination volume is not significantly impacted by changes in the 30-year fixed-rate mortgage of less than 100 basis points.

The report cites the Mortgage Bankers Association forecast of a 2% decline in origination volume in 2018 because of fewer refinancings. There will be a corresponding shift in share to just 26% refi originations from an expected 33% for this year. The lower volume should not be a major concern "as new originations have much higher penetration rates for private mortgage insurance," Binner and Bloomer said.

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PMI Interest rates Real estate GSE reform FHA Federal Reserve FOMC