Although Radian has seen its inventory of delinquent loans decline for eight consecutive months, what will happen in the fourth quarter remains to be seen, said chief executive S.A. Ibrahim.
Expanding in an interview with National Mortgage News on comments made at the Keefe, Bruyette & Woods Insurance Conference, Ibrahim said he would not have expected the delinquency inventory to go down in the first two months of the third quarter.
And even though the company is very happy with the developments in the past eight months, there is still the issue of its growing levels of reserves. He said many other factors affect loss reserve estimates, such as default composition, the aging of defaults, severity and the rate at which defaults will become a claim.
Typically the first quarter is the best of the year in terms of seasonality for mortgage delinquencies. The second quarter tends to be a mixed bag and the third quarter is tough typically, he noted.
But the last three months of the year are historically the worst for delinquencies and add in the current problems in the U.S. economy, it creates a lot of uncertainty that the trend of improvement in the number of delinquencies could continue.
Ibrahim added also countering typical seasonality is the book of business from 2007 because it is burning out.
In the industry as a whole, recent numbers from the Mortgage Insurance Cos. of America show that July was the second consecutive month with more new defaults than cures, after four months of the cure/default ratio being over 100%.
For July, MICA members reported 56,086 cures and 68,892 defaults for a ratio of 81.4%, a decline of more than 10 percentage points from June. However, this is still better than cure/default ratio of 56.5% for July 2009.
Meanwhile, even as the number of delinquencies declines at Radian, it is the age of those loans that is having an effect on the amount of reserves the company needs to keep.
The number of loans in default at Radian went from 143,914 at the end of the first quarter to 138,015 three months later. However, the number of loans that missed 12 payments or more increased from 57,671 or 40% of the total to 61,646 or nearly 45%. Historically, the percentage of delinquent loans in this bucket is around 10% to 20%.
The reasons why more loans are in this longer-term bucket include foreclosure moratoriums and loan modification programs.
Most of the decline was in the midterm bucket (either going to claim, curing or moving out this bucket and up to the next bucket). Loans that missed four to 11 payments fell from 59,323 in the first quarter to 50,625 as of June 30.
As a loan ages in the delinquency portfolio, there is a need to attach more reserves to it.
The smaller amount of reserves that are released when a loan in the short- or medium-term buckets are more than offset by the reserves set aside to cover aging loans in the longer-term bucket.
At the end of the second quarter, Radian had $3.66 billion in reserves, up from $3.58 billion at the end of first quarter. The company said the amount of reserves taken per delinquent loan has increased significantly during 2010.
Ibrahim noted that Radian has yet to take any benefits from its reserves for successful loan modifications.
He said he told one attendee at the KBW conference it is good that Radian is not adding new loans to its delinquent portfolio but it is bad news that it is still stuck with the older defaults.
But overall, he added, it is fewer bad loans for the company to have to deal with.
