What happened
Shares of Radian Group (RDN -0.14%), a financial company that primarily provides mortgage insurance to mortgage lending institutions, plunged 12% during Thursday's trading session after the company reported its first-quarter earnings results before the opening bell. As you can probably surmise by the reaction, Radian Group's results came up well short of expectations.
So what
For the quarter, Radian Group reported a nearly 8% year-over-year decline in revenue to $288.8 million, yet it managed a 16% improvement in net income to $76.5 million, which worked out to $0.37 in EPS on an adjusted basis. New mortgage insurance written also rose by 25% year over year to $10.1 billion. Finally, book value increased by 9% to $13.58.
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Why the tumble? Wall Street had been looking for Radian Group to deliver $0.43 in adjusted first-quarter EPS, meaning it fell $0.06 per share shy of expectations. Further, there's disappointment with the $10.1 billion in underwriting during the first quarter. Even though this represents a 25% year-over-year increase, it was down significantly from the $13.9 billion in new mortgage insurance written during the sequential fourth quarter.
Of particular note, refinance insurance fell to just 16% of total new mortgage insurance written compared to 27% during the fourth quarter, implying that the higher interest rate environment is beginning to hamper Radian's refinance-related underwriting business.
Now what
If there was a bright spot here, it's that Radian Group's primary mortgage portfolio continues to look less risky and more appealing to long-term investors, albeit it's taken the company the better part of a decade to clean things up. Its first-quarter report notes that 89% of its business was written after 2008, and the number of primary delinquent loans decreased by a double-digit percentage on both a sequential quarterly basis and a year-over-year basis.
The big question that remains unanswered is what might happen to Radian's mortgage insurance underwriting as interest rates rise. It's quite possible we could see a spoiled homeowner spoil Radian's mortgage insurance business. We've seen numerous instances over the past couple of years of mortgage applications plunging with temporary 50 or 75 basis-point increases in the underlying 30-year mortgage rate. If consumers are so unwilling to accept such a nominal increase, which is still well below the historic average mortgage rate, then Radian's quarterly results could be in for some potentially wild fluctuations in the quarters to come.
