The housing crash that resultant financial crisis ripped the private mortgage insurance market to shreds. Over $20 billion was lost by just four companies during the crisis, but the tides are turning, and private mortgage insurers are coming back into the money. Behind the recent resurgence of the mortgage guaranty market are three huge factors, so let’s take a look at how the players are benefiting now, and how it will continue in the coming months.
1. Old news
The major factor holding down the mortgage guaranty business was a lingering inventory of delinquent loans, causing legacy issues for the insurers in the form of payments on such loans. But the plague of delinquencies is subsiding, with American International Group Inc (NYSE:AIG) reporting just a 7.1% primary mortgage delinquencies ratio in its second-quarter earnings report — a 3.2% decline from a year ago. Overall delinquencies fell by 25%, with American International Group Inc (NYSE:AIG)’s rivals reporting similar results:
|2013 Q2 PM Delinquency Ratio
|2012 Q2 PM Delinquency Ratio
|Year Over Year Delinquencies Decline
|Radian Group Inc (NYSE:RDN)
|MGIC Investment Corp. (NYSE:MTG)
Though Genworth Financial Inc (NYSE:GNW) didn’t report its change in delinquency ratio, overall delinquencies fell 23% in its U.S. segment.
Overall, the insurers have been reporting delinquency rates not seen since 2007 or 2008, signifying that the worst is over and that payments for bad loans will be lower going forward. This is great news for investors since new business is flying in the door, and lower obligations for bad loans won’t be such a huge burden on earnings.
2. Out with the acronyms
Beginning in 2008, the Federal Housing Administration began expanding its position in the mortgage guaranty market after only controlling around 3% before the housing crash. As of 2011, the FHA controlled almost 80% of the market, making it very difficult for private firms to compete because of low pricing and more competitive products after private firms tightened underwriting practices.
Now that the market is on the mend, the FHA has begun increasing its premiums in order to entice private players back into the fold. Likewise, the question over whether or not other governmental sponsored entities like Fannie Mae and Freddie Mac should be dissolved, that may create a greater opening in the market share. Fannie recently took out insurance on a $5 billion pool of loans with the newest player in the PMI field, NMI Holdings.