Break out the Tylenol!
Mortgage insurers are going to suffer one hell of a painful hangover from the excesses of the real estate boom as they find themselves forced to increase reserves to pay for claims, according to a new report issued by Fitch Ratings.
"Over the course of 2008 and 2009, given the relative performance and size of the 2007 vintage compared to the 2006 and prior vintages, Fitch expects that the mortgage insurance industry will need to continue posting very high loss reserves as the industry's pipeline of troubled mortgages becomes increasingly made up of 2007 vintage loans and current loss reserves are paid out as claims," Fitch reported in a July research note to investors.
In the report, Fitch was about as blunt as it's ever been when it comes to the state of mortgage insurers: "Fitch believes that the 2007 vintage may prove to be one of the worst underwriting years in the modern history of the U.S. mortgage industry."
Fitch has either assigned a negative outlook or a negative watch rating on the following U.S. mortgage insurers: CMG Mortgage Insurance Co., Genworth Mortgage Insurance Corp., Mortgage Guaranty Insurance Corp., PMI Mortgage Insurance Co., Republic Mortgage Insurance Co., Triad Guaranty Insurance Corp. and United Guarantee Residential Insurance Co.
The ratings agency said it believes the industry will not return to profitability before 2009 at the earliest, and added that it expects to see an increase in the level of claims denial, particularly with regard to claims related to loans underwritten in 2007.
"Generally speaking, the 2007 vintage has produced significantly higher early-term delinquencies than prior vintages," the report said. "This is partly driven by market developments such as home price depreciation, but also due to lax underwriting standards and fraudulent activity."
If there is a bright spot it is that the mortgage insurers maintain adequate capital levels--but Fitch also noted that, should capital levels fall below the minimum requirements, the mortgage insurers could face rehabilitation or liquidation.
While the mortgage industry says it has taken steps to improve its underwriting standards following the collapse last year of the subprime housing market, the results of those improvements are going to benefit loans made in 2008 and beyond, not the heavy volume of mortgages made in 2007 and 2006.
As a result, the mortgage industry and the insurers that cover those long-term loans are in for a rough 18 months at the very least.
"While steps have been taken by the industry to improve the prospects of future business, this updated analysis indicates that the mortgage insurance industry's troubles are not over and may, in fact, get worse before they improve," the report said.
Ouch. Better reach for the Extra Strength Tylenol.
September 1, 2008
Copyright 2008© LRP Publications