Even though Keefe, Bruyette & Woods predicts a 14% decline in mortgage origination volume, the amount of new private mortgage insurance written should increase in 2011 over 2010, in large part because of the Federal Housing Administration program pricing change.
“By no means do we expect a return to levels from before the housing crisis, especially given the ongoing legal disputes some of the insurers have with large lenders over rescinded policies, but consistent growth in new business should help to support the merit of the private mortgage insurance product in the housing market going forward,” declare KBW analysts Nathaniel Otis and William Clark.
By way of example, they point to business trends at Mortgage Guaranty Insurance Corp.
The company saw flow new insurance written volumes over $30 billion each year between 2000 and 2008 (with four of those years in the $70 billion area). However, in 2009, NIW dropped to about $20 billion. KBW predicts a little bit more than half of that when 2010 is done ($11.2 billion) and for 2011, a slight improvement over that to $13 billion.
Radian’s NIW will fall from $17 billion in 2009 to an estimated $10.7 billion in 2010 before rising to $14 billion in 2011. Republic Mortgage Insurance Co. during the same time frame will go from $8 billion to $4 billion before rebounding to $5.4 billion in 2011.
There are two companies where the KBW analysts predict an increase in 2011 business over the 2009 volume. PMI will go from $9 billion in 2009 down to $6.7 billion in 2010 then rise to $9.4 billion in 2011.
Meanwhile, Genworth will see an increase in its MI business between 2009 and 2010, from $7.4 billion to $8.4 billion; in 2011, NIW should increase to $11.2 billion.
The hot-button topic of rescissions and denial will start to cool in 2011, they predict, as burnout from the book of business written during the height of the boom continues and early-stage defaults on recently written business continue to decline.
The cloud over the future of the private MI business is what will happen with the government-sponsored enterprises. Otis and Clark said the issue is not likely to be resolved in 2011, although discussions about a resolution could lead into a formal plan being unveiled in 2012.
“It remains difficult to predict what the future structure may look like, but we do believe that private mortgage insurance will continue to play a significant role in the U.S. mortgage market, especially for low-downpayment borrowers,” KBW said.
As for delinquencies in the underwritten portfolio, KBW said there will be continued steady improvement in 2011, “with larger declines in the first half of the year reflecting more normalized seasonal trends. This will be through a combination of cures (though loan modification or other means), lower new defaults, continued rescissions and paid claims.”
Loan modifications will continue to be a benefit for the MI companies, although to a lesser extent than for 2010.
Some MIs could have low levels of profitability in 2011, while other continue to report net losses.
Otis and Woods called MGIC their “top pick for 2011” as it used more conservative reserving standards than its competitors “and thus should be better positioned for improving trends in the industry moving forward.”
The analysts have some concerns regarding Radian Group, specifically because of possible volatility in its results due to the financial guaranty business and related accounting requirements.
But its MI business will benefit from improving trends and as a whole the company is well positioned for 2011.
The PMI Group has the least flexibility from a capital perspective, but the analysts declared the risk-reward dynamics continue to support their outperform rating on the company.
As for Old Republic International, its mortgage insurance business has one of the higher risk-to-capital ratios. From a capital perspective this does not concern Otis and Woods because the parent can shift capital from other lines of business to the MI segment.
However, they believe ORI will be more cautious than its competition in going after new business.
And while ORI’s title insurance segment “is experiencing good growth trends, the margins in this business do not result in much upside for the overall company.”
