Better prepared: Mortgage insurers amply capitalized to weather crisis
A potential wave of loan delinquencies because of the coronavirus stands to hurt private mortgage insurer earnings, but the companies will still have sufficient capital, a Keefe, Bruyette & Woods report said.
The various programs put into effect following the financial crisis made that possible, including the capital standards established by the government-sponsored enterprises through the Private Mortgage Insurer Eligibility Requirements.
“While we recognize that an impending recession rightfully causes concern for companies with credit risk, our position remains that this time is different than 2008 because of both stronger mortgage underwriting quality, more enhanced risk distribution methods, and robust retained capital buffers,” according to KBW analysts Bose George, Thomas McJoynt-Griffith and Eric Hagan.
“To demonstrate this, we applied an accelerated highly stressed scenario to the insured portfolios to assess the impact on losses and capital levels. We conclude that even a sharp deterioration in delinquencies would be an earnings event, not a book value event, for the industry.”
In the aftermath of the Great Recession, three of the then seven mortgage insurers were forced into run-off because they lacked the capital to pay claims from the increased number of foreclosures.
Even in situations where mortgage insurers grant borrowers forbearances, they must treat the missed payment as a new notice of default. Although many of those borrowers will cure, a certain percentage will eventually end up in foreclosure, triggering a claim. If the Federal Reserve does establish a servicer advance facility, KBW expects lenders to use some of the funds to keep MI premiums current.
KBW ran accelerated stress scenarios on the portfolios of the four companies it follows: MGIC, Radian, National MI and Essent.
“We conclude that the coronavirus is likely to be treated like other natural disasters from a capital standpoint,” the KBW analysts said. “If FHFA were to apply a 0.30x adjustment factor (same as that used for loans in FEMA disaster-declared areas), then the MIs would generally still have extra capital.”
In the stressed scenario, Essent would have the largest excess over its current PMIERs capital, of $616 million. MGIC would have a $159 million excess and Radian, a $59 million excess. National MI, however, would have a shortage of $86 million.
On March 20, NMI Holdings, National MI’s parent, announced it was able to amend its senior secured revolving credit facility.