Over the past month two mortgage insurance firms have halted the writing of new coverage because of a lack of capital. Add that to the continued liquidation of another troubled insurer, Triad Guaranty, and you can boldly state that 38% of the MI industry is toast.
Coupled with a continued decline in home values and no letup in delinquencies one might argue that the mortgage insurance industry—except for the government-managed FHA—is on its deathbed. Or is it?
MGIC, Radian, United Guaranty, Genworth and the somewhat new Essent continue to write new policies, while the battered PMI and Republic Mortgage Insurance brain storm on trying to find a way to create a “new company/old company” structure that effectively shields new (potential) outside investors from paying for the sins of the original company.
For the five active firms still writing coverage their volumes are off considerably from the go-go years but the quality of their new policies is such that future losses will be nonexistent. In other words, as long as these five can keep taking in more revenue than they're shipping out the back door in the form of claims they'll survive—and eventually thrive. (Essent isn't really part of this conversation since they've only been writing coverage since 2010.)
According to MI officials, investment bankers and others, private equity money continues to explore opportunities in the sector, though none have swallowed the bait since Goldman Sachs, JPMorgan Chase and its partners ponied up $600 million to start Essent. (Another MI upstart, dubbed “MAC,” appears to have run out of money or gone underground.)
As one MI source put it, “They [the PE investors] want to invest in new books of business—not the legacy stuff. There's plenty of money out there for new business. The problem is getting rid of these legacy problems.”
“Legacy,” of course, is a code phrase for all the alt-A and nonprime loans the industry insured during the boom years.
One mortgage insurance researcher told me the nation's MI firms have paid out roughly $27 billion in claims the past few years, but he makes an important point: this money has gone mostly to Fannie Mae and Freddie Mac—and without it, the U.S. taxpayers would be on the hook for that cash.
To date, Treasury has given the GSEs $142 billion of federal assistance, a fact apparently not lost on Fannie/Freddie overseer Edward DeMarco, who in a recent speech gave a nod to the “shared risk” between the government-controlled mortgage giants and their MI brethren.
But DeMarco went so far as to suggest that “consideration could be given to requiring greater mortgage insurance coverage, but doing so should be weighed against the financial condition of the individual mortgage insurers.” Translation: DeMarco appreciates the money given to the GSEs from the MIs but he, too, isn't so sure how many will be around in five years.
Anyone familiar with the history of the MIs knows their wagons are hitched to Fannie and Freddie. The GSEs must have MI coverage on their high LTV loans—something that also allows MBS investors to sleep at night.
MI executives are betting that whatever government entity eventually replaces Fannie and Freddie, these new GSEs will need and want mortgage insurance coverage.
For PE investors they need more certainty on that last score, as well as some type of clarification on whether pending risk retention rules will include MI coverage. “Tell me what happens on those two [issues] and I can tell you where the MI sector will be in five years,” said one industry lobbyist.
In other words, the five active MIs will continue to tread water, hoping (praying) that in time delinquencies subside with their claims falling dramatically. The only “good news” they can cling to is that the departure of PMI and RMIC from the space means more business for them.
