FHA poised to outpace private mortgage insurers

The Federal Housing Association is likely to continue to take market share away from the private mortgage insurers for the foreseeable future, a Keefe, Bruyette & Woods report said.

Insurance-in-force for all forms of mortgage insurance grew by 1.3% between the first and second quarters and by 5.5% year-over-year, the report from Bose George and Tommy McJoynt said.

However, FHA had 9.7% annual growth, versus just 1.6% annual growth for the private MIs, continuing a trend since mid-2023.

When compared with the first quarter, FHA's IIF increased 2.3%, while it only rose by 0.4% for the private MIs.

Dollar amount of loans with mortgage insurance

For all forms of mortgage insurance, IIF is $3.14 trillion, with the private companies holding $1.59 trillion of the total.

PMI is mostly used on conforming mortgages, with $1.4 trillion of its IIF on Fannie Mae and Freddie Mac loans, U.S. Mortgage Insurers said.

The share of PMI relative to FHA has declined 440 basis points since the third quarter of 2022, to 50.7% of the market, from a peak of 55.1%.

"We expect PMI IIF growth to remain muted through 2027, reflecting the slow recovery in the housing market," the KBW analysts said.

How many consumers used PMI last year

USMI annual data showed use of its members' product has slipped in line with total mortgage origination volume.

In 2021, nearly 2 million borrowers used private MI; for the same year, industry volume was $4.4 trillion, according to the Mortgage Bankers Association.

The number of private-MI-using borrowers fell to 1 million the following year and to around 800,000 in both 2023 and 2024. Originations in those years were $2.25 trillion, $1.64 trillion and $1.78 trillion respectively, MBA said.

Insurance-in-force at the PMIs rose by 8.1% before falling to 2.9% and then 1.9% over that same time frame, the KBW report noted.

Why FHA will grow faster than private MI

"We expect FHA growth to outpace PMI growth in a higher-for-longer environment as FHA volume continues to benefit from affordability-related factors such as more volume from some large builders and GSE-to-FHA cash-out refinance debt consolidation volume," George and McJoynt noted.

The July MBA forecast predicts the 30-year fixed will average 6.7% in the fourth quarter, before falling to 6.6% in the first quarter of next year and ending 2026 at 6.4%. For 2027 it expects the 30-year to average 6.3%.

In July, KBW reduced the ratings on three of the five private MIs it covers (Radian, Essent and NMI Holdings) and now sees their respective stock prices as "market perform." Arch is covered separately as it has other lines.

But the analysts still remain bullish on the business in general going forward. Each of the companies remained profitable during the second quarter.

How much will private IIF grow through 2027?

For this year, KBW predicts the private MIs IIF will grow by 2%, with 3% increases in each of the following two years. The MBA origination outlook is for $2 trillion this year, $2.2 trillion in 2026 and $2.3 trillion in 2027.

The restoration of the mortgage insurance premium deduction should not have create any meaningful shifts in market share, as it is an across-the-board action, covering not just PMI and FHA, but also other government-guaranteed products including Veterans Affairs and U.S. Department of Agriculture mortgages.

But one potential disrupter for the MI companies is the Federal Housing Finance Agency's pronouncement that conforming lenders can use VantageScore 4.0 on loans sold to the GSEs. The MIs have to adapt their systems to underwrite these loans, just as lenders will.