Mortgage insurance companies are racking up their best volume and profits ever but could be riding for a fall in the not-too-distant future, a new study finds.
*Insurers are carrying more risk by backing borrowings with higher loan- to-value ratios.
*An increase in interest rates could force a larger commitment to variable-rate loans, which are more volatile than the fixed-rate mortgages the companies more frequently insure.
*Many of the thousands of loans that were insured in California during its tailspin years of 1990 to 1994 may very well sour, the study says.
Duff & Phelps Credit Rating Co. sounded the warning in a report issued this month. The 30-page report considers the pros and cons of the mortgage insurance business and examines major companies in the field.
Private mortgage insurance is required by lenders when borrowers put up less than 20% of their loan amount. Mortgage insurers act like other underwriters - assuming risk in exchange for payments. Right now, mortgage insurance companies are well ahead of defaults, the study found.
"The industry is in the best shape it has ever been in," wrote analysts Donald H. Paston and Ralph R. Aurora.
There are nine primary insurers - including General Electric Mortgage Insurance Corp. and PMI Mortgage Insurance Co. - that lenders access on behalf of borrowers. These insurers have total assets of $6.4 billion and loss reserves of $1.2 billion, the Duff & Phelps report states. Well- managed expense and loss ratios contribute to the companies' strengths, the study said.
The analysts expect continued growth, with the insurers collectively producing $1 trillion of insurance originations. "The combination of strong originations and increasing demand for mortgage insurance will enable written premiums to continue to grow - fueling the buildup of statutory capital," they wrote.
The study also projects "continued strong earnings - generating higher levels of internal capital and continued improved levels of financial strength."
But recent developments threaten the companies' progress. For instance, affordable-housing initiatives are allowing very low down payments as incentives. Resultant ratios "may prove insufficient to discourage defaults and, over time, losses may be high," the report states.
Duff & Phelps is also troubled that insurers are also backing more adjustable-rate loans. ARMs increased in 1994 to 37% of insured loans from 21% in 1993.
"The relatively recent development of the ARM product makes it difficult to develop expected loss estimates with the degree of precision available for conventional loans," the report notes.
And+ although California is emerging from recession, the state could still slip back in, the study said. It added that the economy is "still beset by substantial economic difficulties" that could prompt defaults.
It will take successful control of risks for the mortgage insurance industry's financial strength to continue to improve, the analysts said.