The fundamentals for private mortgage insurers were supposed to have improved by now. They haven't.
A year and a half ago, market watchers were expecting the companies to pick up more business after their main competitor, the Federal Housing Administration, adopted tougher standards. And concerns about whether the insurers could withstand expected losses subsided for awhile after several of them raised equity and created contingency plans that would enable them to write new business even if their capital levels fell below a certain threshold. At the same time, many states waived risk-to-capital ratio requirements that could have prevented some insurers from continuing to write policies.
But with the macroeconomic outlook still glum, housing prices still depressed and the FHA's grip on the market for low-down payment loans still intact, the mortgage insurers are stuck in the same rut. New business volume remains down sharply from pre-crisis levels, the insurers continue to pay out hefty claims on soured mortgage loans, and the forecast for when the industry returns to profitability is again murky at best.
"The operating environment has certainly proved to be more challenging for a longer period of time than we had originally anticipated," wrote Nathanial Otis, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc. in a research note last month.
The fate of mortgage insurers, which enable loans with low down payments to be sold to Fannie Mae and Freddie Mac, for now appears to be "on hold," agreed Jim Ryan, a senior analyst at Morningstar.
"No one really knows how much they're going to pay out. It's wildly variable," he said. "It's up in the air whether there will be enough [claims] to put them out of business or whether they can squeak through and will have to raise capital again."
Of the handful of companies in the industry, Genworth Financial Inc., Old Republic International Corp. and United Guaranty, a unit of American International Group Inc., are considered to be in a better position than others because of their businesses are diversified, meaning they can likely cushion the blow of mortgage losses. Monoline insurers MGIC Investment Corp., PMI Group Inc. and Radian Group Inc., are in a tougher position, Ryan said.
Doubts about the companies' survival are evident in the beating their stocks have taken this year. Shares of MGIC are down 44% in 2011 through the close of trading Tuesday; Radian's are down 51%; and PMI's are down 65%. By comparison, the S&P 500 is up 3.1% so far this year.
"There're renewed concerns over the viability of the companies," said Matthew Howlett, a vice president at Macquarie Group. "These companies have lost money for the last year; their losses have remained elevated. And with the renewed macro concerns, which obviously coincide with weak growth, there're just no short-term signals that these companies will return to profitability this year."
Private mortgage insurers' business has been decimated by the rise in FHA lending. Insurance typically is needed for home buyers who do not have enough money for a down payment. But many lenders have eschewed the higher private mortgage insurance rates and now favor FHA loans.
"The FHA owns the market," Howlett said. But the FHA is taking steps to "price themselves out" of the market, he said. "It's just taking time. It's taking time for clients to locate their way to private capital," he said. "The path is there, it's just happening a lot slower. The FHA is still the 800-pound gorilla in this space and it's just taking them awhile to move out."
But FHA's command on the market isn't the biggest thorn in the industry's side, said S.A. Ibrahim, chief executive of Radian.
"We could write more business if the mortgage industry volume overall went up," he said in an interview Tuesday. "We've got twice as much share compared with the FHA compared to what we had a couple years ago so we've been making steady progress. We believe there is room to grow. And the FHA, from everything I hear, remains committed to reducing its share of the industry. They seem to be aligned with us in that respect. It's a question of how long that takes and when it happens."
Much aso will depend on new regulations, namely the qualified residential mortgage rule, which, as proposed, would create a new class of loan exempted from credit risk retention. A QRM would be reserved for borrowers with at least a 20% down payment. Both bankers and housing advocates say that will limit low-cost loans to the wealthy. Radian says it's been lobbying very hard on the benefit of lower down-payment lending.
"So much of our future hangs on policy outcomes in Washington and for the policy outcomes in Washington to go the way we'd like for them to go there has to be confidence in our industry," Ibrahim said.
Otis, of Keefe, Bruyette and Woods, is upbeat on a positive outcome for the industry.
"We believe final rules regarding QRM should establish a more solid role for the value of the private mortgage insurance product, alleviating some fears about the future role of the industry in the housing market," he wrote.
But questions over how much more the insurers will have to pay out in claims and whether they will again face significant capital constraints might be the most worrisome.
" Whether or not the mortgage insurers will have the capital to make good on their obligations is wildly uncertain at present," Morningstar's Ryan said.
The robo-signing scandal that put a halt to foreclosures last year has bought private mortgage insurers a reprieve of sorts, Ryan said. Insurers have been steadily building reserves in anticipation of payouts from foreclosure claims, but the actual payments are "well behind what they would be without government intervention," Ryan said.
Paid claims would have been much higher in 2011 if lenders had not been forced to halt foreclosures and comply with consent orders from federal regulators to determine whether any borrowers were harmed by shoddy paperwork and improper legal filings.
Moreover, lenders have a backlog of 2 million loans that are 90 days or more past due but not in foreclosure, while another 2.2 million are in the process of foreclosure, according to April data from Lender Processing Services.
Michael Zimmerman, a senior vice president of investor relations at MGIC, agreed that there are plenty of uncertainties including a shaky economy.
"We have a lot of delinquencies out there," he said. "We agree there are going to be a lot more foreclosures that will occur and we have reserves for them." But some analysts have understated revenues and assumed more severe losses without taking into account cure rates, he added.
Ibrahim insists that at Radian's mortgage insurance subsidiary, the capital picture has improved substantially: the Philadelphia company has $640 million sitting at the holding company level from the capital raise it did last year that it could tap into; the subsidiary also has $3.5 billion in reserves. (However, the company's risk-to-capital ratio has been on the rise, jumping from 16.8-to-1 at the end of the fourth quarter to 20.3-to-1 at the end of the first quarter.)
Still, some analysts think the renewed concerns over mortgage insurers' ability to withstand an uncertain economy are overblown.
"We have clearly noted that the biggest risk factor for the industry would be a second round of defaults," wrote William H. Ryan, an analyst at Portales Partners LLC, in a research note issued Monday. "However, we surmise it would more likely be related to a double-dip recession causing economic hardship, rather than an incremental 5% to 10% decline in housing prices creating a meaningful second wave of strategic defaults in the housing industry."