The housing crash that resultant financial crisis ripped the private mortgage insurance market to shreds. Over $20 billion was lost by just four companies during the crisis, but the tides are turning, and private mortgage insurers are coming back into the money. Behind the recent resurgence of the mortgage guaranty market are three huge factors, so let's take a look at how the players are benefiting now, and how it will continue in the coming months.
1. Old news
The major factor holding down the mortgage guaranty business was a lingering inventory of delinquent loans, causing legacy issues for the insurers in the form of payments on such loans. But the plague of delinquencies is subsiding, with American International Group (NYSE: AIG ) reporting just a 7.1% primary mortgage delinquencies ratio in its second-quarter earnings report -- a 3.2% decline from a year ago. Overall delinquencies fell by 25%, with AIG's rivals reporting similar results:
|Company||2013 Q2 PM Delinquency Ratio||2012 Q2 PM Delinquency Ratio||Year Over Year Delinquencies Decline|
|Radian Group (NYSE: RDN )||9.7%||13.3%||21%|
|MGIC Investment Corp (NYSE: MTG )||10.2%||12.5%||
Though Genworth Financial (NYSE: GNW ) didn't report its change in delinquency ratio, overall delinquencies fell 23% in its U.S. segment.
Overall, the insurers have been reporting delinquency rates not seen since 2007 or 2008, signifying that the worst is over and that payments for bad loans will be lower going forward. This is great news for investors since new business is flying in the door, and lower obligations for bad loans won't be such a huge burden on earnings.
2. Out with the acronyms
Beginning in 2008, the Federal Housing Administration began expanding its position in the mortgage guaranty market after only controlling around 3% before the housing crash. As of 2011, the FHA controlled almost 80% of the market, making it very difficult for private firms to compete because of low pricing and more competitive products after private firms tightened underwriting practices.
Now that the market is on the mend, the FHA has begun increasing its premiums in order to entice private players back into the fold. Likewise, the question over whether or not other governmental sponsored entities like Fannie Mae (NYSE: FNM-PK ) and Freddie Mac should be dissolved, that may create a greater opening in the market share. Fannie recently took out insurance on a $5 billion pool of loans with the newest player in the PMI field, NMI Holdings.
3. Steady as we go
The housing market is a huge factor in the overall recovery of not just the economy, but also the private mortgage insurance market. With a positive trend in new home sales -- like last month's 6.5% increase in sales of existing homes, a four-year high -- as well as the steady increase in home prices, mortgage insurance is seeing higher demand. Since mortgage insurance is required on loans with low down payments, continued increases in home prices may drive new insurance growth for the private firms.
Since the housing recovery has been slow but steady, and there are still constraints on the recovery because of a low inventory of available houses, a big upside remains for the PMI market as buyers continue to return to the market.
Summing it up
Though private mortgage insurers had a tough go of it for the past few years, and some remain in the red as far as earnings go, the tides have turned and more business is slowly moving their way. While some of the insurers mentioned above specialize in mortgage guaranty, others are more diversified and offer investors a wider opportunity if you're still weary of mortgage insurance after the financial crisis. But knowing the three big factors driving the recent hot streak can help build a solid foundation for more confidence in the business.
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