Although origination volume has slowed from the pace of earlier this year, mortgage insurers have continued to exhibit healthy rates of growth.
MGIC Investment Corp. reported last week that revenues were up 19% and earnings per share increased 23% in the third quarter. MGIC Investment is the parent of Mortgage Guaranty Insurance Corp., the nation's largest mortgage insurer.
Other large publicly traded mortgage insurers, including CMAC Investment Corp., and PMI Group, will report their third-quarter earnings this week and analysts are expecting that they too will come in with solid results. Another publicly traded mortgage insurer, Amerin Guaranty Corp, will report its third quarter earnings next week.
Mortgage insurers provide lenders with partial protection against losses when they make loans with down payments smaller than 20%. Fannie Mae and Freddie Mac require such insurance on any such mortgage they buy or securitize.
Typically, the borrower pays the insurance premiums but it is the lender that is receiving the coverage.
William H. Lacy, chairman and chief executive of Mortgage Guaranty Insurance Corp., said that the revenue and earnings increases were encouraging because they came despite the slowdown in originations. Mr. Lacy also said he expects new insurance written in 1996 to exceed last year's total despite the current softness in loan production.
Robert Hottensen, an analyst at Goldman, Sachs & Co., said it is important to consider changes in the percentage of insurance in force - as well as origination volume - when judging how much growth there will be for mortgage insurers.
Mr. Hottensen added that the mortgage insurance industry had its best year of growth in 1994, even though loan origination volume as a whole declined 30% from 1993.
The percentage of insurance that has remained in force relative to the year-ago level is referred to as "persistency." An increase in persistency means that there has been a lower level of mortgage prepayments and hence a lower amount of runoff.
Bear, Stearns & Co. analyst David Hochstim said that as long as origination slowdowns were not too long or severe, mortgage insurers could have a steady rate of growth simply because of recurring income from existing insurance.
Mr. Lacy said that this was the case for MGIC in the third quarter.
"The lower refinance volume contributed to an improved persistency rate in the third quarter, which has had a positive impact on insurance-in-force growth."
For the third quarter, MGIC's persistency rate was 81.7%, up from 81.5% in the second quarter.
Mr. Hottensen said that he believes that the current economic environment bodes well for MGIC and the rest of the mortgage insurance industry.
"The conditions we'll see likely throughout the balance of this year and into next year remain nearly ideal because without a sharp drop in interest rates, persistency is likely to remain high, housing affordability will remain high and demand for mortgage insurance will be high." Mr. Hottensen said.
He added, however, that lower rates are not always good for the industry because although they induce higher levels of originations in general, they also lead to more refinancing - which increases prepayments and, therefore, runoff.
