Flush with capital, U.S. mortgage insurers are looking to expand overseas, particularly into Hong Kong, where draconian down payment requirements have created a need for their product.
PMI Mortgage Insurance Co. of San Francisco said last week it would reinsure loans for Hong Kong Mortgage Corp., a government agency modeled after Fannie Mae and Freddie Mac that supports home lending in Hong Kong.
Tony Porter, managing director of international markets at PMI, said he expects his company to reinsure $1.5 billion of Hong Kong mortgages during the next 12 months.
Meanwhile, GE Capital Mortgage Insurance Corp., a unit of General Electric Co., is also considering Hong Kong, a spokesman said. "We are not participating right now, but we are continuing to evaluate opportunities there," he said.
And United Guaranty Corp. is believed to be eyeing an expansion into Hong Kong. Officials at the Greensboro, N.C., company were unavailable to comment.
Mortgage insurance companies are looking overseas because last year's combination of low defaults and high refinancings has left them with "a huge amount of capital," said Steven Schwartz, an analyst at ABN Amro Chicago Corp.
"Companies are looking to see what they can do" with that extra capital before deciding whether to give it back to shareholders, he said.
Hong Kong has attracted their attention because it is one of the first economies in Asia to develop a U.S.-style secondary market, said Sandra Stocker, vice president of mortgage guarantee at Hong Kong Mortgage.
The returns from insuring mortgages in Hong Kong are higher than in the United States, PMI's Mr. Porter said. "Pricing is better, relative to the risk."
The Hong Kong Monetary Authority prohibits banks from originating mortgages with down payments of less than 30%. This has been a major obstacle to homeownership. Just under 50% of Hong Kong citizens own their homes. That's up from 45% four years ago but still much lower than the 66% homeownership rate in the United States.
The down payment requirement, however, creates an opportunity for mortgage insurers. This year, the monetary authority said it would let banks originate mortgages with loan-to-value ratios of up to 85% if they use insurance from Hong Kong Mortgage and PMI.
In the United States, mortgage insurers' role is to cover default risk on low-down-payment loans for Fannie and Freddie, who are barred from buying loans with less than 20% down without some outside credit enhancement.
Under the arrangement, Hong Kong Mortgage guarantees the difference between the loan balance and 70% of the home's value. PMI reinsures 100% of that, effectively taking the risk off the government's hands.
The program has already attracted strong interest. When it was begun two weeks ago, 26 lenders signed up "on the first day they could have," Mr. Porter said.
PMI is well aware of the economic crisis that has rocked Asian economies. However, Mr. Porter said, the worst may be over for Hong Kong.
"We've seen a lot of depreciation in home prices, but our tendency is to think that's over or nearly over," he said. "There's not much room for prices to fall further."
Moreover, higher unemployment has not led to massive defaults. "Borrowers in Asian countries tend not to default because they have high savings rates and support from family members and they don't have a lot of mobility options," Mr. Porter said.
Mortgage borrowers in Hong Kong have personal covenants under which they are responsible for any loss to the lender, he added.
At yearend, 0.83% of Hong Kong mortgages were more than 90 days past due, compared with 0.60% in the United States. "This is as good as it gets in the U.S. and rougher than it has ever been in Hong Kong, and we have those delinquency rates," Mr. Porter said.
Another risk factor is that Hong Kong homebuyers tend to prefer newer homes, making older properties less desirable and hence less marketable. "In Hong Kong, it's not charm; that's an old place," Mr. Porter said.
And unlike in the United States, most mortgages in Hong Kong have adjustable interest rates. "Payments that move are always more risky than ones that don't," Mr. Porter said.