After trying for years to vary their revenue sources, mortgage insurers have finally succeeded by setting up shop overseas, offering new products, and even becoming loan workout specialists.
"Virtually every major player in the mortgage insurance industry is implementing a diversification strategy of some kind," said Hank Reeves, senior vice president of sales for GE Mortgage Insurance in Raleigh, N.C.
The General Electric Co. unit has been moving into countries just starting to show demand for American products from the sector. "We are very much focused on the international market," Mr. Reeves said.
The mortgage market as a whole is booming, but insurers have lost business to new products such as captive reinsurance arrangements, offered by some lenders willing to take some of the risk in return for some of the premium, and the "80-10-10" loan.
Under that arrangement borrowers take a first and second mortgage simultaneously - one covering 80% of the principal and a second, "piggy-back loan" taking care of an extra 10% (the other 10% is the down payment provided by the homebuyer). Borrowers get around the requirement for mortgage insurance because the two loans are separate, and mortgage insurance is only required when one loan finances for more than 80% of a house's value.
The business's downturn can be traced to the Homeowners Protection Act of 1998, under which mortgage insurance policies bought after July 1999 are terminated once borrowers achieve 22% equity in their homes.
Analysts at UBS Warburg, Lehman Brothers, and Morgan Stanley have issued reports in recent weeks applauding mortgage insurers' diversification. These added revenue streams will serve them well in the face of strong refinance activity that is expected to continue through the third quarter.
When borrowers refinance a loan, the mortgage insurance is cancelled and there is no guarantee they will need insurance for the new loan. Because of booming real estate prices, many borrowers have been able to demonstrate that the equity they own in their home is more than 20% of its value, so they have not had to buy insurance on their new mortgages.
So-called persistency rates, or the percentage of insurance policies remaining in force a year after a mortgage loan was made, fell to roughly 60% in the first half, compared with about 70% in the first half of 2001, according to analysts.
Morgan Stanley's Ken Posner and Lehman Brothers' Bruce Harting wrote in their reports that having diversified revenues will help these companies soften the revenue-loss blow of the refinance boom. Gary Gordon, a managing director at UBS Warburg, said in his Aug. 15 report that it will help mortgage insurers stay out of dangerous market-share wars.
"Luckily for investors, management at the MIs generally avoid" such battles "and choose to invest excess capital elsewhere," Mr. Gordon wrote. "This decision is a credit to the management involved, in our view."
Another company expanding globally is PMI Mortgage Insurance Co. of Walnut Creek, Pa.
Glen Corso, PMI's vice president in charge of investor relations, cited market studies that indicate demand for mortgage insurance in other countries may double over the next 10 years.
PMI entered Australia and New Zealand in 1999 by purchasing the Australian insurer MGICA Ltd., which it renamed PMI Mortgage Insurance Ltd.
That same year it started providing services to Hong Kong Mortgage Corp., Hong Kong's equivalent of Fannie Mae, and it branched into Europe last year.
"We needed to expand internationally so we could gain the expertise in dealing with non-U.S. markets and be on the forefront of what we felt to be a developing trend," Mr. Corso said.
PMI broke into title insurance and bond reinsurance in the 1990s and into servicing distressed mortgages in March of 2000 by buying a stake in Fairbanks Capital. (Its title insurance company is American Pioneer Title Co. and the bond reinsurance is done through RAM Reinsurance Co. Ltd.)
Mortgage Guaranty Insurance Corp. also sees profits in bad credits.
In 1998 the Milwaukee company bought a stake in C-BASS LLC, a New York-based servicer and securitizer of troubled mortgage loans. The next year it bought a stake in Sherman Financial Group, also of New York, which services and securitizes more general consumer debt.
MGIC spokesman Geoffrey Cooper said that in the second quarter C-BASS contributed 23 cents to the company's per-share earnings of $3.19. Sherman contributed a "small profit," he added.
MGIC is also doing more on the Internet. In January 2000 it launched eMAGIC.com, a portal that charges lender for access to mortgage-related services from a network of vendors. Mr. Cooper said 16,000 loan originators had used the site through the first half of 2002, up 30% from a year earlier.
The company has emphasized bulk insurance, in which insurers provide coverage to a pool of mortgages rather than to individual loans.
"We consider bulk securitization to be one of the core pieces of our diversification efforts," Mr. Cooper said. "This is business that was not being done within the primary mortgage insurance market" - it has traditionally been served by government agencies - "and therefore has been really a large expansion of our business." MGIC's bulk securitization business ballooned to $25.7 billion of loans in 2001 from $400 million in 1998.
An MGIC competitor, Radian Guaranty Inc., also has stakes in C-BASS and Sherman Financial. In February of 2001 the Philadelphia company bought New York-based Enhance Financial Services Group, which had been MGIC's partner in C-BASS and Sherman. (Radian holds stakes in other insurance firms as well.)
Chairman and chief executive officer Frank Fillips said Radian spent four years trying to apply its insurance expertise to other markets. Enhance, he said, "fit that need in our strategic plan."
He said he is not uncomfortable with the idea of sharing ownership with a rival.
"We both want these companies to succeed," he said. "Our interests are very much aligned with each other in that partnership."
UBS Warburg's Mr. Gordon noted that Triad Guaranty Insurance Corp. has had no need to invest in diversification. The Winston-Salem, N.C., company has been able to grow by teaming up with lenders to share both the mortgage insurance premium and risk of default under thee captive reinsurance arrangements.
Jerry Schwartz, Triad's vice president of marketing, said: "We think that lenders appreciate that we are focused on meeting their needs. The fact that we are not diverted into other aspects of the insurance industry or outside the domestic market lends more credibility."
