MGIC's earnings beat foreshadows positive results for other MIs

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MGIC Investment Corp.'s second-quarter earnings coming in higher than expected can be seen as a positive for the other private mortgage insurers, one analyst's first take said.

The Milwaukee-based company reported net income of $167.8 million, or $0.46 per share, ahead of the consensus estimate (and B. Riley FBR and BTIG estimates) of $0.42 per share; Keefe, Bruyette & Woods expected $0.41 per share.

This is down from the $186.8 million, or $0.49 per share, earned one year ago.

B. Riley FBR analyst Randy Binner expects the earnings beat trend to continue for other MIs, Radian Group and NMI Holdings.

"We remain bullish on the PMIs, as we see the Federal Housing Administration continuing to cede more market share to the private markets, based on the FHA audit," Binner said in his report. "The MI group we track is trading at approximately 30% of its 10-year median P/E ratio and at approximately 25% of its five-year valuation range.

"We expect GSE reform will continue to be in the forefront heading into the 2020 election cycle. In any case, we believe the capital support provided by PMIs will be a part of the GSE housing ecosystem given significant private capital needs there regardless of the regulatory outcome," he continued.

MGIC's new insurance written of $14.9 billion was ahead of Binner's expectations of $13.9 billion. One year prior, MGIC wrote $13.2 billion.

"As in recent quarters, MGIC's beat was facilitated by improvement in the company's credit profile, a $30 million reduction in losses incurred stemming from the release of reserves on previously received delinquent notices," said BTIG analyst Mark Palmer in his research report.

Insurance-in-force grew to $213.9 billion, compared with $211. 4 billion at the end of the first quarter and $200.7 billion from June 30, 2018.

"We continue to benefit from favorable employment and housing trends which contributed to an increase of insurance in force, a low level of new primary delinquency notices received, a decline of the primary delinquency inventory, and additional positive primary loss reserve development," MGIC CEO Patrick Sinks said in a press release.

Separately, Flagstar Bancorp reported net income of $61 million, up from $50 million for the second quarter of 2018. Adjusted earnings per share of $0.71 beat KBW's $0.69 estimate.

"Our mortgage team delivered a strong quarter as they maintained pricing discipline and grew gain-on-sale margin by 17 basis points compared to first quarter 2019 and 18 basis points compared to second quarter 2018," said Flagstar President and CEO Alessandro DiNello in a press release. "It is also the third consecutive quarter that gain-on-sale margin expanded. The improvement in net gain-on-loan sales more than offset a lower net return on mortgage servicing rights."

"During the quarter we recognized a $30 million partial charge-off related to the Live Well Financial loan we disclosed in our first-quarter Form 10-Q," he added. "While we believe a recovery of some amount may be realized through legal remedies, we cannot quantify that at this time. We are confident this is an isolated situation as the credit quality of our loan portfolio remains strong."

Flagstar's net earnings also included a $25 million fair value adjustment benefit related to a 2012 settlement with the Department of Justice. "The lower value resulted from a change in the expectation as to the likelihood and timing of payments to the DOJ," Flagstar said.

Mortgage rate lock commitments dropped 7% from the second quarter of 2018, to $8.3 billion from $9 billion one year prior. Its net gain on sale was up 19% to $75 million from $63 million, more than offsetting a 44% reduction in net return on its MSRs to $5 billion from $9 billion.

Mortgage origination income at KeyCorp surged 43% from the year prior, while its servicing fee income rose by 9%.

"Our recent acquisition of Laurel Road and the investments we have made in our residential mortgage business contributed to our top-line results this quarter and position us well for the future," Chairman and CEO Beth Mooney said in a press release.

Consumer mortgage income was $10 million, up from $7 million one year ago, while mortgage servicing fee income grew to $24 million from $22 million.

But home equity loans on the balance sheet fell by $900 million — largely the result of consumers continuing to pay down their home equity lines of credit.

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