Foreclosure wave unlikely in 2021, BTIG says

A trio of mitigating factors will prevent a foreclosure wave when coronavirus-related forbearances end, thus allowing private mortgage insurers to thrive next year, BTIG’s 2021 outlook report states.

An improving employment picture, higher home prices and post-forbearance payment deferrals are the significant loss mitigants, said Ryan Gilbert, an analyst at BTIG who has taken over its coverage of the MI industry. He is positive on the industry, with 2021 earnings per share estimates averaging 4% above the consensus.

An improved albeit still challenged U.S. economy should increase the number of forborne homeowners who will be able to exit by reinstating their loan to current status, entering into a repayment plan or resuming payments and adding the missed ones to the end of their loan term.

Furthermore, the COVID-19 vaccine and another potential round of fiscal stimulus from the federal government will boost the labor market, making it easier for borrowers to resume payments, Gilbert said.

Payment deferral, he said, is "potentially significant" for loss mitigation.

"Given strong home price appreciation since March, the deferral option will likely have a minimal impact on many borrowers," Gilbert said. "In the third quarter, 45% of Freddie Mac's forbearance exits were through deferral, and 10% of Fannie Mae's total loans in forbearance went into deferral, second only to reinstatement at 22%.

"The data from the government-sponsored enterprises suggest that borrowers and servicers see the value of the deferral option. We expect these numbers to move higher as more loans reach the end of their forbearance period," he said.

The expected shift in 2021 to a purchase market mainly driven by first-time home buyers is a positive for the MI industry, but in particular Gilbert is bullish on Essent and National MI, the two companies that do not have a legacy, pre-financial crisis book of business. (BTIG covers five of the six active MIs, the exception being Arch.)

Companies made decisions around the amount of new insurance written in 2020 based on their capital levels relative to the Private Mortgage Insurer Eligibility Requirements.

But going into next year, the PMIERs excess situation — for the companies Gilbert tracks — is at a similar level and "we believe each company is well positioned to both grow NIW and cover any potential increase in delinquencies in 2021," Gilbert said.

Essent and National MI will resume taking market share from the legacy companies next year, Gilbert predicts.

"PMI is a commodity product and the advent of risk-based pricing has further reoriented the playing field around price," he said.

Those newer companies have "access to debt/equity/reinsurance capital and no legacy pre-2009 exposure. However, if loss ratios improve faster than we expect, there is likely more near-term upside potential at Radian and MGIC" for investors because their respective stocks trade below book value, Gilbert said.