For the last three years, private mortgage insurers have suffered two great woes: credit losses on policies written before the crisis and an inability to compete with Federal Housing Administration prices on new insurance.
The latter problem, however, may soon be taken care of. On Oct. 4, the FHA plans to raise its premiums. Industry players and analysts say this price hike could restore the competitiveness of private insurance, potentially letting the companies win back market share and rebuild their reserves.
For that to come about, the insurers must regain the trust of their lender customers after intense feuds over the carriers' attempts to rescind policies on soured loans. At the same time, insurers will also face a temptation to bring in badly needed business by competing irrationally. Given some insurers' still-tenuous financial positions, discipline may be a great deal to ask.
At least one mortgage insurer would like to see more restrictions on its less well-capitalized peers — and is already criticizing rivals' business practices.
"If you look at underwriting changes, MIs are loosening in ways that are putting on riskier loans," said Kim Garland, the chief operating officer of United Guaranty, the mortgage insurance unit of American International Group Inc. Rivals are engaging in "similar behavior to what got MIs in the trouble in the first place," he said.
But state and federal regulators have so far held off from imposing significant limits on new issuance by weak insurers, and mortgage insurers of all strengths are working to improve lender relations. Some mortgage insurers argue that the industry is more than ready to take on new volume, contending that the sector's woes have been overstated.
"Perception is more important than reality," said S.A. Ibrahim, the chief executive of Radian Group Inc. in Philadelphia, who estimated that private insurers have paid $12 billion in claims so far. "The bigger issue is, lenders don't realize we have the capital or that we have not continued to tighten credit."
Lenders undoubtedly will benefit from the better prices, service and product diversity that would accompany revived competition between insurers and the FHA. With lender-insurer relations strained, analysts expect to see insurers introduce products aimed at attracting lenders by offering some protection against policy rescissions.
Several, including Radian, have begun aggressive, lender-targeted marketing campaigns. Dubbed "Radian is Ready," the effort touts the company's "low up-front premiums" and "flexible MI options."
"Come October 4th, there's just no comparison," a new Radian website proclaims. "[W]e're ready to prove why we are the compelling alternative to FHA."
Though industry executives and analysts say that the insurers' main competition is not among themselves right now, some worry that the companies may regain market share without regard to their relative financial health.
Because state regulators and the government-sponsored enterprises have consistently agreed to waive minimum capital requirements since the onset of the housing crisis, financially weak insurers are not being forced to compete on what is normally an insurer's single most important trait — holding sufficient capital to pay off all plausible losses. People would never buy flood protection on their homes from a firm that was not sure it had enough cash to pay claims incurred during a prior year's deluge. Yet such purchases are arguably occurring in the private mortgage insurance market.
Lenders must have insurance on any low-down-payment mortgage they sell to Fannie Mae or Freddie Mac. But because the GSE is the policy's beneficiary, a lender may be less concerned about the reliability of the coverage than it would be if it were buying insurance on a mortgage in its own portfolio. This situation could introduce hazard into the insurance market, encouraging the more desperate players to offer more generous terms, or more lax underwriting, than the more stable ones.
"There needs to be a reward in the market for those MIs that are financially strong," said Garland at United Guaranty, which, with a BBB rating, is the highest-rated of the GSEs' main mortgage insurers. (United Guaranty is capitalized separately from its parent, AIG.)
Most lenders already discriminate between private insurers on loans held in their own portfolios, Garland said, but "Fannie and Freddie will still buy the loans from weaker MIs."
Radian disputed the notion that lenders are indifferent to the stability of a loan's insurer.
"Lenders are in tune with the capital adequacy," said Bob Quint, Radian's chief financial officer. Were an insurer to fail, he said, lenders would suffer reputational and possible financial damage. "If a lender thought that we were in particularly poor financial shape and had a good chance of receivership, they clearly wouldn't do business with us."
Neither Fannie nor Freddie, nor their conservator, the Federal Housing Finance Agency, would comment for this story. In testimony before lawmakers Wednesday, Edward DeMarco, the FHFA's acting director, said new capital and a new entrant to the insurer market (Essent Guaranty, which began writing policies in the second quarter), were positive signs for the sector.
The major mortgage insurers have been resilient since the housing collapse, due in part to their success at rescinding so many delinquent claims. Analysts now say that, barring a new crisis, the industry appears to be on a path to righting itself.
"Mortgage insurers are essentially fully reserved for their respective delinquency pipelines," said Matt Howlett, a vice president at Macquarie Capital Inc.
Likewise, an analysis by Moody's Investors Service predicts that "individual rated issuers and the industry as a whole [will] be able to pay future claims," though in some instances the ratings firm's base scenario suggested that the timing of cash flows will be tight.
"The insurers' ratios of claims-paying resources … to the present value of estimated base-case losses are paltry," Moody's analysts said. In other words, even assuming solid earnings on new business, some insurers would barely be able to cover claims stemming from their old portfolios.
In their quarterly financial statements, most of the companies note, as MGIC Investment Corp. did, that their ongoing ability to write insurance is dependent on temporary waivers from state regulators and the approval of new issuance by subsidiaries.
Likewise, Radian (which, according to Moody's analysis, has a greater ability to absorb future claims than most rated insurers) is benefiting from $1.9 billion of writedowns on its derivative liabilities due to its own "performance risk" — a fair-value discount meant to quantify the market-perceived odds that the company will fail to pay its obligations in full.
That writedown has been diminishing, however, and Quint said that it would be unreasonable to extrapolate a risk of failure from a metric designed to comply with accounting rules.
The GSEs' financial statements mirror the perception of instability. Fannie's most recent quarterly filing stated that doing business with mortgage insurers in a weakened financial position entails an "increased risk" that the GSE will not be able to collect on insurance policies. Despite this threat, mortgage insurers "continually approach us" to approve corporate restructuring plans that would let them continue writing insurance, the filing noted — and Fannie has in some cases agreed.
The GSEs have compelling reasons to cooperate. When the housing market tanked, said Macquarie's Howlett, the mortgage insurance industry feared it would be cut off by the government. Despite junk-level credit ratings, "that didn't happen because Washington didn't want it to happen," he said. "The regulators and Washington looked the other way because they feel MIs are a loss-mitigation tool and it encourages homeownership and the longer-term theme is to get private capital back in."
David Goodwin, an insurance attorney at Covington & Burling in San Francisco, agreed. "There doesn't seem to be much appetite to let them go under," he said. "If you did, you'd probably have to recreate them anyway."
With neither lenders nor the GSEs inclined to choose mortgage insurers on the basis of their finances, competition will probably occur on other fronts. One could simply be lenders' perception of how a particular insurer is likely to handle rescissions.
If a lender believes one company is not as strident about pursuing them, "you may have a situation where originators are more selective as to which insurer they're going to use," said Arlene Isaacs-Lowe, a senior vice president at Moody's. Similarly, analysts predict that lenders may be receptive to insurance products that reduce the risk of rescissions in the future. In such an approach, insurers would presumably do more due diligence up-front — and then enter into contracts that would make it harder to kick a loan back to the lender.
Radian's Quint said he does not believe the industry's accommodations to lenders would get out of hand. "We've all gone through a period of extreme hardship and difficulty," he said; "it would be surprising to see any participant in the MI industry acting irrationally, whether in pricing or underwriting."
Garland suggested mortgage insurers could compete on other qualities. They would be wise to develop individualized risk-based pricing akin to that for auto insurance, he said (think of higher premiums for red sports cars), and suggested that insurers' stability be built into the GSEs' own pricing.
"We would love to see Fannie and Freddie … charge more for a loan for those with weaker mortgage insurance," he said, "so the market would be sending a signal to force MIs to become more financially strong in their behavior."