|
Special Reports
Mortgage Insurance
Fitch: Troubles Could Hurt for Years
By Brad Finkelstein
The mortgage insurance industry will be negatively affected in the years ahead
by poor performing subprime and low-doc/no-doc loans, according to a commentary from Fitch Ratings here. "While
the current situation was initially ignited in the subprime mortgage sector, it has begun to spill over to other
mortgage asset classes, such as adjustable-rate, negative-amortizing, alt-A and second-lien mortgages. The major
factors driving the deterioration in mortgage performance indicators has been the poor underwriting process demonstrated
by many mortgage lenders the past few years, combined with the continued and accelerating home price decline which
has eliminated the option to sell or refinance a home to avoid foreclosure for many borrowers," the report
said.
The situation is leading to a phenomenon, which occurred in the 1980s when home
values in parts of the nation fell below what the borrower owed and as a result the borrower just walked away from
the home.
Fraud, Fitch noted, also has played a key role in this situation.
The result for mortgage insurers is an increase in delinquencies, especially in
loans written between 2005 and 2007. With reduced options, Fitch said it expects a greater percentage of these
borrowers will end up in foreclosure in the years ahead, which for mortgage insurers means higher claims and losses.
Financial losses will hurt the MIs ability to grow capital internally, which the
rating agency said is a concern given the cost of and/or challenges of raising external capital in a depressed
market.
While all of the mortgage insurers Fitch rates are impacted by the problems in
the business, those problems affect each of those companies differently. Each MI has a differing level of exposure
to different product sectors, have participated in different levels of business arrangements such as captive reinsurance
and have different organizational structures, with some benefiting from diversified parent companies or by having
mortgage insurance businesses in other countries.
Going forward, Fitch noted business written starting this year and beyond should
perform better than the 2006 and 2007 vintages because of stricter underwriting guidelines and increased premium
rates. "However, the current stress being experienced across the mortgage markets may prevent many of the
MIs from effectively taking advantage of these opportunities. For one, the MIs capital bases are expected to be
reduced over the intermediate term given projections of negative earnings until about the 2010 timeframe. Second,
with expectations for increased future delinquencies and, subsequently, defaults, the amount of capital required
to support legacy books of business gets enlarged," Fitch said.
But, Fitch said, mortgage insurers should benefit from captive reinsurance arrangements.
Delinquencies with loans written in the past three years "will cause cumulative losses to penetrate well into
the reinsured layer of their traditional primary flow business."
Still, Fitch added, most of the MI company losses will be from "non-captive-related
businesses, such as the bulk and modified pool business lines, where the industry retains higher concentrations
of at-risk mortgages."
|
