5 questions for Radian's CEO on preparing for an onslaught of defaults
The first-quarter results from private mortgage insurers seem as though they're from another era. Given that the coronavirus didn't hit the U.S. hard until mid-March, the firms largely posted strong financial results.
But that is certain to change as delinquencies increase over the next few months, because the federal relief act granted forbearance rights to borrowers with conforming mortgages.
For long-term observers of the business, rising defaults might bring up unpleasant memories of the Great Recession, in which the entire industry was nearly eliminated because of capital issues.
The introduction of the Private Mortgage Insurer Eligibility Standards in 2016 forced the firms to be more conservative, in part by forbidding them from counting future premiums among their current assets. But the rise in defaults means each company will have to increase the capital it holds in order to remain in compliance.
Radian was a survivor of the past turmoil. Its current CEO, Rick Thornberry, joined the company in February 2017. Previous to this, he held executive positions at Nexstar Financial Group (which he co-founded), Citicorp Mortgage and Prudential Home Mortgage.
Following Radian's first-quarter results, National Mortgage News spoke with Thornberry about the outlook for the MIs and both the company's past experiences with downturns and his own.
Questions and answers have been edited for clarity and length.
The first-quarter results were favorable for Radian. How does that set up the company for the rest of the year, when there are expected to be a lot of forbearance-related delinquencies?
We expect that the increase in default rates would have a significant impact on our financials for the second quarter and possibly the next couple of quarters because of the need to reserve against those defaults.
Probably the most important takeaway, is that we've spent a significant amount of time over the last couple of years repositioning our capital structure to prepare for an economic downturn. The strength with which we come into this kind of economic downturn is different from the financial crisis. We have significant excess capital in our business, so as we go into the quarters where we expect to see some headwinds, we're in an extremely firm capital position and we expect to be able to navigate through this environment effectively.
The PMIERs framework has really been a good thing. It provides a consistent level of capital that was built to address extreme stress scenarios. It's also procyclical, so the near-term issue is that we have to increase our PMIERs minimum required assets to address the increasing defaults from CARES Act forbearances. As an industry we're well capitalized, much better capitalized than we were before.
When we entered the financial crisis, we had poorly underwritten loans, we had inflated home values, and inconsistent compliance with standards. And that's what led to the crisis, it was a housing-led crisis. So it's completely different, we and the other MIs are well capitalized, we're the beneficiary of PMIERs.
Given the shifts in the new-insurance-written share in the first quarter, were there any pricing wars going on? Genworth picked up a larger market share during over that period.
We don't necessarily focus on market share. We focus on creating economic value for our shareholders and making sure we work with the right customers and find ways to enable their competitiveness. I don't see extreme pricing competition. You're going to see swings in market share relative to a few large bid situations, which you see market share trade between certain players. We're pretty consistent where we sit, we don't participate in those bid situations, we don't see the economics of them.
Actually, as this economic cycle became apparent, we began to adjust our pricing to reflect the change in the economic climate. We've seen others do the same thing, not only the MIs, but the GSEs and lenders tightened their parameters and adjusted their pricing to reflect the current risk in the environment. Market share is only one indication of presence in the market.
A higher-than-normal percentage of loans Radian insured during the quarter were refinances, which means they were relatively recently written to start with. Is that a concern for you in terms of the quality of that business?
I think that's a factor of the environment today. Those prepayments will drive the persistency of our portfolio lower. But they are offsetting a decline in the purchase market. We can see the housing market come back, not so much this year but probably going into 2021. We came into this with a really strong demand curve and a lack of supply. Once people feel more comfortable with their employment situation, we'll see listings reestablished and we'll see first-time home buyers reenter the marketplace to acquire their home.
How did the divestiture of Clayton Services in the first quarter help set the company up for the next few quarters?
As we defined our strategy around our real estate business, we didn't really didn't see a strategic fit for [Clayton] further, so we were happy to find a very good owner with the Covius team. It allowed us to really focus on the real estate services that we feel are opportunities across our MI customer base, but also opportunities for us to grow and be a disruptive player in certain markets that are somewhat old and stale. We're very focused on the title business, where we're not building a business based on agents, and we're seeing nice growth in that business. We're also focused on valuation.
You have been through a few of these down cycles but on the lending side. Is the playbook any different now you're running a mortgage insurer?
What I've learned running servicing organizations allows me to further appreciate what some of the servicers are going through from both a liquidity point of view around the advances and some of the hedging costs.
But also I think as we look down the path here, both the experience Radian had during the financial crisis and my experience give us insights into what we can anticipate and expect the servicers will go through when they address the significant number of defaults.
In this environment, one of the things that feels different is that there is a better outcome to the extent that we can keep borrowers in their homes. And the better outcome is not just for the borrower and not just for the credit risk investor, it is good for the economy. So, yes there is an initial rise in defaults, but in the long run those forbearance plans are going to allow consumers to stay out of harm's way and navigate this temporary hardship better.