Recognizing the growing influence of mortgage insurance companies, two Wall Street analysts have announced plans to keep regular tabs on this category.
Jonathan E. Gray of Sanford C. Bernstein & Co. and David Hochstim of Bear, Stearns & Co., both in New York, began their coverage last month by issuing positive ratings on some companies. Mr. Gray rated CMAC Investment Corp. and PMI Group Inc. "outperform," and Mr. Hochstim rated MGIC Investment Corp. and CMAC "attractive."
The analysts, who already follow mortgage companies and agencies, cited the growing volume of mortgage insurance as a reason for their decision to begin following the companies.
Mortgage insurers give holders of residential loans partial protection against defaults by borrowers who make small down payments. The borrowers are usually required to pay for the policies. About half a dozen companies offer most of the mortgage insurance sold.
A rise in low-down-payment lending has spurred demand for the companies' services, according to Mr. Gray. This demand, in turn, "has provided a significant growth opportunity for the private mortgage insurance industry," he wrote.
He also said the companies are bolstered by their links to Fannie Mae and Freddie Mac, the secondary market juggernauts that buy loans with mortgage insurance.
He tempered that upbeat view, however. "We believe conservatism is warranted in assigning relative valuation targets for these companies, given growing investor wariness regarding the risk of recession and deteriorating consumer credit quality," he wrote.
Mr. Hochstim is bullish about the future of well-run mortgage insurers, believing they have the ability to weather economic storms.
"Although the private mortgage insurance business can be highly cyclical," he wrote, "the higher-quality companies should not experience a dramatic drop-off in earnings unless there is a sharp downturn in the nation's economy."
As a group, Mr. Hochstim said, mortgage insurers have been building reserves in expectation of future claims, while also improving their underwriting practices.
"Moreover," he wrote, "home prices have been stable or have risen in most regions of the country over recent years, thereby reducing potential losses in the event of a default."