How FHFA's latest coronavirus notice helps mortgage insurers

The Federal Housing Finance Agency's decision to treat the coronavirus outbreak as a natural disaster event should also benefit private mortgage insurers, although the announcement did not spell that out, a BTIG report said.

"What we believe was relevant to the PMIs was the FHFA's statement that 'today's action clarifies that mortgage loans with COVID-19 payment forbearance shall be treated like a natural disaster event and will remain in the MBS pool,'" BTIG analyst Mark Palmer said in a report. "While the agency's statement was not made in direct reference to the insurers, we believe it made clear how it intends to treat COVID-19 and supported our belief that it will allow the insurers to apply a 70% haircut to capital charges on pandemic-driven delinquencies."

If that happens, there will be a much smaller hit to each insurer's capital surplus under the Private Mortgage Insurer Eligibility Requirements. Those rules come from the FHFA's regulated entities, Fannie Mae and Freddie Mac.

Palmer added that in BTIG's discussions with each of the management teams of the companies it tracks (with the exception of Arch Capital Group), those executives had been operating under the assumption that the FHFA would be making such a declaration.

Still, mortgage insurance firms saw no immediate benefit to their common stock prices after the announcement, even as mortgage servicers stock prices rose. Palmer said he was "somewhat surprised" by the investor reaction.

(However, as part of a broader market recovery, all of the mortgage insurers' holding companies were trading higher from their Tuesday close as of 11:15 a.m. Eastern time on Wednesday.)

The mortgage insurers are comparing the COVID-19 situation to what happened in August 2017, when Hurricane Harvey caused widespread damage in Texas.

"They each noted that the ultimate impact of the hurricane on the group had been significantly less than many had expected as the vast majority of the delinquencies that occurred after the storm had cured as its impact abated, employment rates recovered, and policyholders sought to hold on to the equity in their homes," Palmer said.

The companies are likely to emphasize in their upcoming first-quarter earnings releases and conference calls that they are better prepared to withstand any problems that arise from COVID-19 than they were back in 2008, Palmer said, because of the PMIERs and the use of risk-sharing arrangements, along with stricter underwriting requirements.