For Mortgage Insurance Providers, Opportunity Knocks
Earlier in 2005, S.A. Ibrahim’s pitch that mortgage investors would benefit from insuring portfolios against a spike in borrower defaults fell on deaf ears.
Now his phone is ringing off the hook.
Ibrahim, CEO of the risk management and mortgage insurance company Radian Group Inc., predicted the housing slowdown that took hold last winter lead to greater losses on mortgages, or at least lift bets that eroding credit would hurt the value of related securities.
“Six months ago they weren’t ready for it,” Ibrahim said last week. “Now, we are starting to get some phone calls from customers that include lenders with home loan portfolios.”
Today, home price appreciation has ground to a halt, inventories stand at 13-year highs, and homeowners face rising payments. Even banks that cherry-picked the best home mortgage loans for investments now fret about portfolios losing value.
Delinquencies are rising more after edging higher in the first half of this year, according to the Mortgage Bankers Association. The delinquency rate for loans to the riskiest borrowers rose 1.37 percentage points to 11.7 percent in the second quarter from a year earlier, while the pace on prime mortgages edged up 0.09 point to 4.39 percent.
“There is a heightened sensitivity to credit risk among investors,” said Ibrahim. “A big disconnect between that and the behavior of credit spreads, which have been tight, may soon reverse.”
Other private mortgage insurance providers say they sense an uptick in business from underwriters seeking to enhance the loans they sell or securitize.
“The momentum is shifting” in favor of mortgage insurers, said Paul Miller, an analyst at investment bank Friedman Billings Ramsey Inc. in Arlington, Virginia. “The heydays of great credit are over and we are going back to a more normal state and giving insurers some pricing power.”
As bad credit mortgages become more pertinent within the lending industry, home mortgage insurance “in force” expanded for a 10th consecutive month in September to $645.4 billion, marking its largest year-over-year gain for 2006. Applications are on the rise since the summer.
The recent focus of bank regulators on mortgage underwriting standards has also intensified concerns over loan quality. The guidance, which aims to strengthen underwriting standards on riskier home loans, is turning banks to insurers as a way to satisfy regulators or make “cosmetic” improvements to their portfolios.
PMI Group Inc. executives have seen a pick-up in business from investors looking to enhance pools of loans that were not protected when first sold. That said, the response is short of a “wholesale panic” in mortgage credit, said David Katkov, President and Chief Operating Officer of PMI Mortgage Insurance Co. in Walnut Creek, California.
“People are being prudent risk managers… you don’t want to be caught in the bust,” he said.
Insurers, while benefiting from investor jitters, must negotiate the credit downturn themselves since rising defaults also mean more claims. While the amount of insurance on the books has risen due to widespread bad credit issues among U.S. consumers, investors are skeptical the companies will see benefit in their bottom lines.