U.S. mortgage insurers' stocks have touched new year-highs on confidence about success of the government's plan to let homeowners keep their homes, but the big question is how much steam the rally has left.
Shares of the largest mortgage insurer MGIC Investment have gained 47 percent in value in the last one month. Those of rivals Radian Group and PMI Group have gained 65 percent and 109 percent, respectively.
With the housing market showing signs of recovery, investors seem to be more at ease in investing in names that were once seen as the worst affected by the financial crisis.
Even as industry experts believe that the sustainability of the rally depends on the mortgage market, they think delinquencies could have finally peaked.
As the foreclosures story improves with government help, mortgage insurers could see some good news coming their way, Lawrence White, a professor at New York University's Stern School of Business, said.
(Mortgage insurers) are still a very risky proposition as it's still not clear that we are out of the wilderness here, but things are definitely looking better for them, White said.
The Obama administration's push to let homeowners keep their homes by asking lenders to modify their loans has not only brought relief to many Americans who are struggling to meet their payments, but also to the mortgage insurers.
Late March, Bank of America, under pressure from Massachusetts Attorney General Martha Coakley, said it would offer about $3 billion in loan forgiveness to about 45,000 troubled homeowners.
With lenders going easy on the loans, these insurers stand to benefit as they will have to pay less in claims.
Also, PMI got Freddie Mac's approval allowing its unit to write new mortgage business in certain states if the main operating unit could not do so due to its inability to meet regulatory capital requirements.
Analyst Rafay Khalid of S&P Equity Research, however, thinks the rally has been powered by some very optimistic investors who think the credit profile of these companies is improving and that they will post profits.
It's going up too quick, too fast, too much, Khalid said.
LOSSES STILL SEEN
Mortgage insurers have been posting losses for past several quarters and may have to wait a while before they turn profitable again.
From my projections on these companies, they will have losses through at least 2010. Consensus estimates on PMI are positive, which I am a little concerned about. I think that's being a little optimistic, Khalid said.
Mortgage insurers' books have taken a hit in the recent past from backing subprime bonds and mortgages that saw a surge in defaults as credit and housing markets in the United States melted, impacting economies globally.
A home buyer who could not offer a 20 percent down payment, for instance, would often turn to mortgage insurers.
The specialty insurance companies saw their business prosper during a five-year housing boom that ended in 2006, and then saw investors shunning these stocks as record home loan defaults threatened their stability.
Much of the losses will be recorded on the legacy portfolios, industry experts say.
The mortgage that they are insuring today are much better than the mortgages insured in the years 2005 to middle of 2008. The vintages are the bad ones -- the worst ones right now are 2006, 2007 and middle of 2008, Khalid said.
(Reporting by Sweta Singh; Editing by Anil D'Silva, Unnikrishnan Nair)