There's not a whole lot of consensus on whether the housing market is improving or not, but it does seem clear that mortgages are being written -- particularly ones where the borrower doesn't put a lot of money down. That's just fine with private mortgage insurers, who have seen their fortunes rise recently as they pen insurance documents to go along with these new loans.
Housing bust nearly sunk this industry
Mortgage insurance companies have taken a real beating over the past few years, and many are barely hanging on. Things appear to be changing, though. Private insurers Radian Guaranty (NYSE: RDN), MGIC Investment (NYSE: MTG), and Genworth Financial (NYSE: GNW) all reported an increase in business in April, writing new insurance policies worth $7.1 billion, up $400 million from March. This represents a huge increase from last April, in which the value of policies written was only $3.7 billion.
There may not be a whole lot of new mortgages being originated that are tied to home sales, but low interest rates have fueled a refinance craze that has been keeping banks very busy. More important for mortgage insurers, the Obama administration's Home Affordable Refinance Program was retooled last fall to make it more accessible for homeowners with underwater loans. This caused an explosion of refinanced mortgages in the first quarter of this year -- approximately 180,000, up from 93,000 in the previous quarter.
Things are looking so good, in fact, that new players are entering the field. One newcomer, Essent Guaranty, has been raising money from the likes of Goldman Sachs (NYSE: GS) -- which has noted that it used its own money, and not customers', for the investment -- and JPMorgan Chase.
One reason for the interest is that older companies are looking a bit battle-weary, having paid out $30 billion in claims over the past few years. Another is that Freddie Mac and Fannie Mae have been insuring fewer loans, leaving the business to the private sector. Legislative wins such as mortgage insurance requirements on FHA-backed loans have helped give the industry a much-needed boost.
Fool's take
For the existing insurers, the HARP program is a win-win, despite the fact that the government has released banks from put-back fears if there are errors found with these new refinanced loans. This point has upset United Guaranty, the mortgage insurance arm of insurance giant AIG (NYSE: AIG), which fears being held responsible for fraudulent loans. While United claims to support the HARP program, officials are concerned that banks may refinance bad loans and use HARP as cover. This is a valid concern, considering the historical perspective, and time will tell whether this will be a problem. Hopefully, the industry's exposure will be low, since only those with good repayment records are eligible to participate in the program.
Even the new competition probably won't be an issue. As some observers have noted, banks generally go with what they know, and the four major insurers mentioned above have had the lion's share of the business for many years. If insurers are prudent and avoid taking on undue risk, HARP loans may just float them along until housing recovers. If they can improve their outlook until that happens, these companies may truly rebound.
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