In many ways the private mortgage insurance business turned the corner in the second quarter starting with its new insurance written volume being the highest in quite some time.
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Still, the second quarter NIW figures show the continuation of some trends in the business. For the industry as a whole, efforts to recapture business from the Federal Housing Administration are gaining steam.
But there has also been a shift in market share among industry players in new business written. UGC’s new insurance written was $8.5 billion for the quarter, while Radian did $8.3 billion, MGIC—the former No. 1—did $5.9 billion, Genworth $3.6 billion and Essent $2.2 billion; those totals do not include HARP loans, which those firms consider to be modifications of existing coverage.
But is this growing volume of business enough to counter the bad stuff still on the books? At least one industry observer has his doubts.
David A. Reber, president and CEO of zIngenuity, a boutique consulting firm for lenders regarding mortgage and mortgage insurance issues, said, “The mortgage insurers continue to write high-quality business at what appears to be very compelling returns. We have modeled the impacts to capital and surplus and are of the opinion that this business does not generate enough capital in the short term to materially alter the outlook for any mortgage insurance company that is already in a precarious position.”
In a report issued by the company at the end of July, before the second quarter financials came out, it said MGIC, Genworth and Radian all “are facing capital pressures to varying degrees.”
The next few quarters, zIngenuity continued, will be trying for these companies, and “we recommend that originators and servicers with current or historical exposure to these MIs monitor the industry closely.”
In speaking with industry executives, however, they are bullish on the capital situation.
And MI company executives point to the entry of Essent into the business and the capital raise by NMI Holdings Inc. as signs that there is money to be invested in mortgage insurers. The zIngenuity report added the NMI capital raise is “a testament to the strength of the business being insured currently by the MI industry.”
On the other hand, three companies, Triad, Republic Mortgage Insurance Co. and PMI, are in run-off and operating under deferred payment orders. RMIC’s parent company, Old Republic International Corp., tried to spin out the unit, but an unnamed “stakeholder” put the kibosh on the plan. If successful, the spin out would have eventually reentered the underwriting business.
Genworth’s management also put aside any suggestions of spinning out its mortgage insurance subsidiary in its second quarter results conference call.
And of course, the political issues—the future of Fannie Mae and Freddie Mac, plus regulatory definitions—must at least be glanced at in any observation of private mortgage insurers. Any solutions to those issues won’t be known until after the presidential election, possibly months and even years later.
Bazemore believes mortgage insurers can sustain the growth in NIW, because there is capacity available to write more business and regain even more share from FHA. As a company Radian has been aggressive is signing up new customers.
“The real question is, will there be policies or changes that are implemented that deter that increase?” she said, explaining issues such as Fannie Mae and Freddie Mac price increases could make FHA a better execution for lenders.
It was a lot of work to move the needle back towards private MI, including teaching loan officers that it is a better execution than FHA.
The CEO at UGC, Kim Garland, said that while unable to make forward-looking statements on upcoming quarters or future conditions, “the strengthening of the overall mortgage industry is an encouraging sign for all participants in the mortgage value chain, including mortgage insurers.”
Michael Zimmerman, MGIC’s senior vice president of investor relations, said what happens in the overall housing market is the main driver of future growth for the MIs.
The private sector is regaining market share from FHA and that should continue to grow. The pace of growth is difficult to predict.
He pointed out that historically, the split of high loan-to-value mortgages (itself being 20% of the market) needing MI was two-thirds private, one-third government programs. Now, approximately 30% of all home purchases are done with less than 20% down, with the MI split 70% government and 30% private; at the low point a couple of years ago, the private sector share was 10%.
Zimmerman shared Bazemore’s concerns about pricing practices on conforming loans, adding lender overlays as another issue. He also pointed out that Ginnie Mae securitization right now is giving lenders a better secondary market execution than their conforming counterparts.
Another issue is reputation risk. With the poor second quarter results, lenders could shy away from one or more companies. But Bazemore pointed out the older companies are still approved to do business and the financial losses were not unexpected by investors or customers.
Garland added his company “is excited about the future of the MI business. We believe that financially strong companies using private capital to insure quality loans that are appropriately underwritten and priced can be the foundation for a strong and sustainable mortgage insurance industry.”
Zimmerman even gave another suggestion—put the private sector in front of the government for all high LTV loans take the first hit and let FHA act as a reinsurer of the risk.
The MI industry has survived without government support; it has been able to recapitalize and attract new players.
People have disparaged the MI model because of the losses, but the system has worked.
“It boils down to a simple question—what do you do with this credit risk?” he asked.
