Moody's: Good and Bad News on Essent

The entrance of a new firm, Essent Guaranty, into the mortgage insurance space is a positive for the sector as a whole, but could spell bad news for some existing players, according to a report from Moody's Investor Service. A new player, the report says, "expands the origination capacity, currently constrained, and, therefore the relevance, of the sector. The new player will, however, adversely affect the weakest mortgage insurers by bringing in alternative origination capacity." Moody's explained that supporting the continued relevance of mortgage insurance is key during this period when the government is deciding the future role of Fannie Mae and Freddie Mac. Even though a decision is not expected to be made until 2011, "We cannot rule out the possibility that narrower GSE charter modifications will be imposed that are intended to increase funding for the high LTV segment of the market ahead of such reform. Such modifications could hurt the mortgage insurers if they support an alternative to, or reduce the need for, mortgage insurance," says the report, written by Arlene Isaacs-Lowe, a senior vice president at Moody's. New capacity reduces the likelihood of that kind of charter modification taking place. But Moody's thinks weaker MI players could be hurt by the entrance of new capital because originators and the GSEs could reevaluate their relationships with those firms and limit the amount of new business they get.