Loss-making U.S. mortgage insurers such as billionaire John Paulson-invested PMI Group stand to gain as their bigger federal rival, the FHA, raises its premium rates to boost its cash cushion.
Private players including PMI, in which Paulson has a 3 percent stake, MGIC Investment and Radian Group, were crowded out of the market by the popularity of loans backed by the U.S. Federal Housing Administration, which offered lower rates and affordable down payments to new home buyers.
The FHA, which currently accounts for a third of primary insurance written, had a 20 percent market share of total loan originations in April-June, more than 10 times its 2006 share.
However, the agency has been burning through its cash reserves due to higher default rates, and now plans to shore up its balance sheet by trebling the annual fees it charges to new borrowers.
Mortgage insurers' shares have slumped by more than three-quarters since mid-2005 at the housing price peak. The KBW Mortgage Finance Index .MFX is down 82 percent in that period.
The insurers have focused on trying to win back volume from the FHA, said Teresa Bryce, president of Radian's mortgage business.
We're trying to talk to lenders about what it would take to get them to start using mortgage insurers more, and we feel that we are starting to see some pickup there, she said.
Rather than lending directly, the FHA guarantees loans made to borrowers who meet certain restrictions. It saw its market share swell as the mortgage crisis unfolded. Faced with rising defaults, private mortgage insurers could do little to lower their rates, surrendering clients to the FHA.
There are expectations for improved market share for MIs in the near future, said Piper Jaffray analyst Michael Grasher.
With more clarity on their results, mortgage insurers are increasingly attracting investor attention.
Along with Paulson, hedge fund Omega Advisors has boosted its stakes in PMI and Radian and invested in MGIC.
However, the private mortgage insurers are still some way from reporting regular profits.
Delinquencies are bouncing around the bottom with no immediate catalyst to project them from that level, said Grasher. It's too soon for any earnings growth.
Of the top three U.S. private mortgage insurers, analysts predict only MGIC will return to profitability in 2011, while Radian and PMI will have to wait until 2012, according to Thomson Reuters I/B/E/S.
Macro factors such as unemployment are taking a toll, too, on firms already reeling under pressure from businesses insured over the boom period, said David Ledford, senior vice president of the National Association of Home Builders.
This week's dire housing data won't help either, as the sector needs more home loans to insure.
New home sales slumped to the slowest pace on record last month and mortgage purchase and refinancing applications rose by less than 1 percent in the first week of August, even as 30-year loan rates fell to a 20-year low of 4.57 percent.
We'd like to see them have their capital replenished and have them be more active in the marketplace, Ledford said.
(Reporting by Sweta Singh in Bangalore, Editing by Ian Geoghegan)