Even as mortgage lenders are having a rough time, mortgage insurers are sitting pretty.
Three of the four publicly traded mortgage insurance companies - PMI Mortgage Insurance of San Francisco, Radian Group of Philadelphia, and MGIC Investment Corp. of Milwaukee - blew past the consensus estimates for per-share earnings in the second quarter, all posting gains of 20% or more. The fourth, Triad Guaranty, met the consensus, reporting a 15% gain.
The insurers - which cover default risk on low-down-payment loans - can thank, at least in part, the same cyclical factors that are hurting lenders. Rising interest rates in the last year have discouraged homeowners from refinancing, and that means insurance policies are staying on the books longer and expenses are lower.
"The primary driver of our results is the persistence of our book of business," said W. Roger Haughton, chairman of PMI. Refinancing booms like that of 1998 "are good for the lender but not as good necessarily for us because you get a lot of runoff."
During such booms, lenders overloaded with applications often contract out underwriting work to mortgage insurers. This is expensive for the insurers. "At best it's a break-even," said David Graifman, an analyst at Keefe, Bruyette & Woods Inc. But as refinancing volume has evaporated, so have contract underwriting expenses.
To be sure, not all news has been good for mortgage insurers this week. Radian's stock fell sharply Thursday after it told analysts it believes it is losing market share and that it has restated a number from its first-quarter results. At midafternoon, the stock was trading at $57.75 a share, off 10.2%.
But generally, the market is in a "sweet spot" for the insurers, said Kenneth A. Posner, an analyst at Morgan Stanley Dean Witter. The strong economy has kept default rates low, so insurers are paying fewer claims. The market for purchase loans remains active, and more of the new loans that are being insured have adjustable rates or high loan-to-value ratios, for which insurers can charge higher premiums.
Rising rates are good for mortgage insurers only up to a point. If the 30-year fixed mortgage rate were to exceed 9%, appetite for purchase mortgages would dwindle, and if higher rates started to hurt the economy, the insurers' claims would go up again, analysts and executives said.
Frank P. Filipps, Radian's chairman, said he prefers a boom environment. "When you have a market that's very active," he said, "it's just more fun to be a participant." Referring to PNC's recent announcement that it is considering a sale of its mortgage unit, Mr. Filipps said, "When you get into these kinds of markets, with major participants making radical decisions, it's no fun for the rest of the players to be sitting around contemplating what's going on."
The threat of competition from outside the industry - from banks offering piggyback mortgages and Fannie Mae and Freddie Mac offering alternative insurance arrangements - has abated in the last year, analysts said, but competition among the seven insurers remains fierce.
In a teleconference Thursday, Radian told analysts it fears it is losing market share because of its refusal to underprice "bulk" insurance of loans to be pooled and securitized. In an interview, Mr. Filipps said Radian bid on and lost several such deals this year, because "the pricing would not generate an attractive return on our allocated equity."
Keefe's Mr. Graifman said he thought it was this comment that had prompted the selloff in Radian shares. Others suggested the stock fell because Radian told analysts it had overstated by $1.5 billion the primary insurance-in-force it had at the end of the first quarter, due to erroneous data from a mortgage servicer.
Among other possible explanations: a correction after a big run-up in the stock price last week on takeover rumors that analysts called dubious. And Mr. Filipps said some investors may have been disappointed by a 40% drop from the year earlier, to $5.5 billion, in new insurance written.