After a strong 2000, private mortgage insurers may face a tougher year now that the economy is slowing and refinancing activity has picked up.
Those factors could create a toxic combination, though executives for the insurers say they remain optimistic about 2001.
Mortgage insurers generally grab a lower share of refinanced mortgages than they do of other loans, because what often happens when borrowers refinance is that they realize they have generated enough equity in their home - around 20% - to cancel the required insurance. Also, widespread layoffs resulting from the economic deceleration could in turn result in higher delinquencies, defaults, and losses on mortgage loans.
These changes explain why shares of the four publicly traded mortgage insurance companies - MGIC Investment Corp. of Milwaukee, PMI Group Inc. of San Francisco, Radian Group Inc. of Philadelphia, and Triad Guaranty Inc. of Winston-Salem, N.C. - have fallen an average of 23% since late last month after rising steadily most of 2000.
The stocks have gained some ground this week but are well below their 12-month peaks.
In a notable move, Morgan Stanley Dean Witter & Co. recently trimmed its 2001 per-share earnings estimate for MGIC by 5 cents, to $5.80. The brokerage company cited faster prepayments and the "likely uptick" of refinancings and default rates as reasons it lowered the earnings target.
These ominous signs notwithstanding, insurance executives said they expect this year's figures to be better than 2000's.
"Last year was a great year for the company, and 2001 should be an excellent year," said Curt S. Culver, president and chief executive officer of MGIC. He attributed the market jitters over the sector to uncertainty - which he said Wall Street loathes - but argued that because of the underlying environment in the mortgage industry, there will be plenty of business to drive revenues through the year.
Mr. Culver said there are fewer candidates for refinancing now because the last refinance boom, in 1998, happened five years after the refi market had a surge to speak of. Also, many borrowers have not built up the necessary equity to drop their insurance, even on loans that are refinanced, he said.
If defaults and losses rise, "billions of dollars in business" that was lost because borrowers were able to avoid mortgage insurance in a good economy revenues will be driven back to the industry, he said.
Frank P. Filipps, chairman and CEO of Radian, said that if origination volume tops $1.3 trillion this year - and some economists are predicting more than $1.5 trillion - it will be a great year for mortgage insurance companies, regardless of where the activity comes from.
"People are expecting that the markets for mortgage origination, including refinances, could develop to anywhere between $1.3 trillion to $1.6 trillion in activity," he said. "At $1.3 trillion we will have a good year, and at $1.6 trillion we will have an outstanding year."
Hank Reeves, senior vice president of sales for General Electric Mortgage Insurance Corp., said the business' outlook is very positive. "We think there will be strong new insurance written in this environment, because it's simply going to be a bigger market," he said.
Nonetheless, the executives said their companies have prepared for a possible recession by beefing up their loss reserves. And even if the worst-case scenario does not come to be, the industry is bracing for higher losses.
Yet Mr. Filipps said that private mortgage insurers are in business to pick up the tab for defaulted mortgages, and a potential increase in claims should not be viewed as a negative. Downturns in the economy happen periodically; the problem is that the market has not seen one in seven or eight years, he said.
"People have forgotten that negative parts of our cycle do exist, but they do," Mr. Filipps said. "People buy private mortgage insurance to protect against the downside of the cycle. That's why we're here."