Private mortgage insurance firms that saw their business shrivel during the subprime lending bonanza of 2005-2006 are set to win back market share if they can weather the current mortgage crisis.
A homebuyer without the cash to make a large downpayment could traditionally get a mortgage if he bought insurance that would protect the lender against default.
As investors poured money into the mortgage market during the recent housing boom, many borrowers could forego insurance and still buy a home by taking out two or three loans.
Under popular 100 percent financing programs known as piggyback loans, borrowers used one mortgage for 80 percent of the purchase price and other financing for the remaining 20 percent.
Mortgage insurance firms enjoyed a taste of the early housing boom but their business dwindled as piggyback loans grew dominant as the housing market peaked last year.
But before mortgage insurance firms can look forward to future opportunities they must first overcome the short-term uncertainty of rising default rates on home loans. Increased foreclosures, particularly among subprime borrowers with damaged credit, are likely to cut into profits at many mortgage insurance firms.
Wall Street investment in mortgage assets were a main driver for the recent housing boom, but financial markets have been rocked in recent weeks as more home loans are failing and the riskiest mortgages are now harder to get.
Credit losses are going to hit before the longer-term benefits of higher insurance levels come onto their book of business, said Steve Stelmach, who studies the mortgage insurance industry for FBR Capital Markets in Washington.
PMI Group, one of the nation's largest mortgage insurance specialists, saw new insurance volume jump from about $27 billion in 2000 to over $46 billion a year later, before falling to about $32 billion in 2006.
But now those numbers are on the rise, several industry sources said. The use of private mortgage insurance was up 40 percent during the first six months of the year compared to 2006, according to the Mortgage Insurance Companies of America.
Our flow of insurance has been dramatic and very strong this year, said Kevin Schneider, president of the Mortgage Insurance Companies of America and head of U.S. mortgage insurance for Genworth Financial, Inc.
SLUMPING SHARE PRICES
In July, FBR's Stelmach downgraded the mortgage insurance group to market performer and many leading firms have seen their share price tumble this year.
Milwaukee-based MGIC Investment Corp. MTG.N was trading at around $65 dollars in mid-June and closed Wednesday at $37.32 on the New York Stock Exchange. Radian Group Inc. closed at $22.30 Wednesday after seeing highs above $65 in February while Genworth closed at $30.46 Wednesday after touching $37 in February.
I would expect, across the industry, that there is going to be a period of rising loss... (but) mortgage insurance companies are overall well capitalized and in a good position to weather the storm, said MICA's Schneider.
Unlike mortgage lenders that rely on investors to buy the loans that they write, mortgage insurance firms are largely self-sustaining and do not require a lot of outside capital, Schneider said.
That said, Radian last week said it had drawn down half of a $400 million of a credit facility for greater financial flexibility and adequate liquidity for the long term. The company said it did not have an immediate need for additional liquidity. MGIC and Radian are now locked in a dispute over a proposed merger and losses that the companies suffered in C-BASS, a subprime mortgage joint venture.
Still, the industry got a boost this year from lawmakers who ruled that mortgage insurance payments would be tax deductible for loans originated in 2007. Schneider said that his industry will push for that tax exemption to be extended. U.S. homeowners already receive a tax deduction for their mortgage interest payments.
Stan Lund, president of the Arizona Association of Mortgage Brokers, said he closed almost no loans with mortgage insurance between 2004 and the end of 2006 but that they have returned as lenders have taken piggyback loans off the shelves.
All of a sudden Wall Street did not want these products anymore, he said. In the last 120 days or so, they have really started to disappear.