Mortgage insurers will feel the pinch from long forbearance timelines

Private mortgage insurers should expect to feel the impact of currently forborne mortgages, which may not cure at the same rate as they had when mass payment relief was granted in the past, Fitch Ratings said in a research report issued this week.

When borrowers receive a forbearance following a natural disaster, they are more likely to resume payments as scheduled. Many observers have assured worried servicers that COVID-related forbearances will be resolved in a similar fashion, but the two scenarios are vastly different, Fitch points out.

"Fitch considers the current situation to be unprecedented," Don Thorpe, a senior director at the ratings agency, wrote in the report. "As a result, this historical tendency may not hold.

"There is considerable uncertainty about the ultimate economic disruption that will be caused by the coronavirus pandemic, and due to forbearance, there will be a significant time lag before ultimate insured losses are known."

The company issued a negative outlook on mortgage insurers because it anticipates that they will need to raise additional funds to meet the Primary Mortgage Insurer Eligibility Requirements established by the government-sponsored enterprises, as well as risk-based capital rules that 25 states have for these companies.

On the other hand, "mortgage insurers have proactively raised capital to compensate, and the capital markets have thus far been willing to supply that additional capital," Thorpe said.

Mortgage insurers have to set aside funds when they receive a notice of delinquency from the servicer and only pay claims if and when a loan is foreclosed upon.

Because of federal and state mandated foreclosure moratoriums, mortgages are going to remain in the delinquent loan inventory for a longer time frame than normal, Thorpe said.

For their part, mortgage insurers have been reporting that their inventory has been declining in recent months, but they are nowhere near the pre-pandemic levels.

National MI's delinquent inventory went from 1,449 mortgages at the end of March to a peak of 14,236 on Aug. 31. As of Nov. 30, the inventory was down to 12,532 mortgages.

Essent Guaranty had 31,950 loans in its inventory on Nov. 30, down from 33,656 one month prior. At the end of the first quarter, Essent's inventory was at 5,841 loans.

At the end of June, Radian had 69,742 delinquent mortgages in the inventory. As of Nov. 30, it was down to 57,176 from 59,604 one month prior. On March 31, it was just at 19,781 mortgages.

Before the pandemic, MGIC's inventory consisted of 27,384 mortgages. The most recent data, as of Nov. 30, shows the inventory was at 59,236 loans, down from 61,521 on Oct. 31, 64,418 on Sept. 30 and 66,626 on Aug. 31.

Another factor that may mitigate possible losses for the mortgage insurers are rising home prices, which make it more likely that a distressed borrower is able to sell the property for more than what is due on the loan.

On the other hand, increased job loss could contribute to new loan defaults and the lower cure rate that Thorpe was concerned about.

"Economic indicators improved somewhat since the worst of the pandemic," Thorpe said. "However, uncertainty about the strength and timing of the economic recovery, unemployment, mortgage loan delinquency cure rates and housing prices drives considerable volatility in potential loss outcomes."