Mortgage Insurers Face Tough 2009, Fitch Says

U.S. mortgage insurers face a rough road ahead, according to a report published Tuesday by Fitch Ratings, which said it expects insurers to face a negative outlook over the intermediate term. “Fitch expects continued loss development in 2009 as ‘at risk’ insured exposures move through their loss development cycles, national home prices continue to decline, and the overall U.S. economy weathers a recession,” analysts Roger Merritt, Davie Rodriguez and Jeffrey Berkes said in a statement. As an industry, mortgage insurers are heavily exposed to the 2007 vintage, which represents about 30 percent of the industry’s risk in force according to Fitch, and coincided with a low point in mortgage underwriting discipline — many mortgage insurers saw opportunity in the collapse of second liens and a newly-favorable tax status afforded in 2007. Early 2008 business exhibited similar underwriting characteristics to the 2007 vintage, as well, Fitch said, and is likely to post similar performance — although the analysts note in the report that business written in the second half of 2008 is expected to perform better, as a result of tighter underwriting standards. “Mortgage insurers face a real risk of breaching regulatory capital limits, which will likely limit the industry’s ability to take advantage of new and potentially more profitable business to offset challenges in legacy portfolios,” said Fitch’s Merritt, a managing director at the rating agency. “For certain standalone MIs, holding company liquidity may be at risk from lending covenants tied to net worth and risk-to-capital.” The report did not specify which MI firms might be more at risk than others. Perhaps a larger question, however, is whether the mortgage insurance business will remain a viable one when this crisis is over — many insurers have ceased looking to write new policies and/or have been downgraded to the point that they risk losing the ability to write insurance for the GSEs. Given that many insurers are also fighting tooth-and-nail on claims, as well, according to various HousingWire sources, some wonder if the MI industry will be able to regain its footing. “The long-term success of the MI industry will depend on its ability to weather the current crisis, which could be materially influenced by various mortgage market and economic stabilization initiatives currently being considered at the state and national levels,” the Fitch report reads, in part. “Additionally, the MI industry’s future is closely aligned with the future of the GSEs as well as the industry’s ability to support the origination needs of the GSEs given the MI’s capital constraints.” Fitch also said it is currently in the process of updating its mortgage insurance capital model, although the firm did not provide specifics; something tells us it won’t be to loosen rating criteria in this area. Write to Paul Jackson at paul.jackson@housingwire.com.