In a report entitled, "U.S. Mortgage Insurers 2008 Review and 2009 Outlook-Continued Losses and Capital Demands," the firm expects continued loss development in 2009 as at-risk insured exposures move through their loss development cycles, national home prices continue to decline and the overall U.S. economy weathers a recession. Losses are likely to shift from weaker underwriting segments and geographic regions experiencing the most dramatic home price declines to the broader prime market if unemployment rates continue to trend up as expected.
According to Fitch, as an industry, mortgage insurers are heavily exposed to the 2007 vintage, which represents about 30% of the industry's risk-in-force and coincided with a low point in mortgage underwriting discipline. The collapse of the piggy-back secondary market and the nonconforming residential mortgage-backed securities securitization market fueled demand for mortgage insurance in 2007, just as the mortgage market began its steep retrenchment. As a result, the industry's new business volume grew dramatically in 2007, with a significant portion of the business in loans with weaker credit characteristics such as loans with 95% and higher loan-to-values.
Fitch found that early 2008 business is likely to post similar performance although business written in the second half of 2008 is expected to perform better as a result of tighter underwriting standards. Mortgage insurers are expected to continue with active loss mitigation efforts through policy rescissions at a declining rate and to claim further captive benefits to offset gross incurred losses.
So far, capital constraints remain the most serious problem facing individual mortgage insurers going into 2009. The risk of breaching regulatory and/or debt-based risk-to-capital limits is high, and is limiting the industry's ability to originate new and potentially more profitable business to offset challenges in its legacy portfolio. For certain standalone mortgage insurers, holding company liquidity may be at risk from lending covenants tied to net worth and risk-to-capital.
"Mortgage insurers face a real risk of breaching regulatory capital limits, which will likely limit the industry's ability to take advantage of new and potentially more profitable business to offset challenges in legacy portfolios. For certain standalone mortgage insurers, holding company liquidity may be at risk from lending covenants tied to net worth and risk-to-capital," said Fitch Ratings Managing Director Roger Merritt.
The outlook report finds that CUNA Mutual Group has however performed better than other mortgage insurers. CMG has benefited from its niche business focused on insured mortgages originated by credit unions and has not needed additional capital. According to the findings, CMG's superior performance can be attributed to the stricter underwriting practiced by credit unions relative to other mortgage originators. In addition, CMG has implemented tighter underwriting standards as its insured portfolio has exhibited some deterioration in light of the current operating environment.
The long-term success of the mortgage insurance industry will depend on its ability to weather the current crisis, which could be influenced by various mortgage market and economic stabilization initiatives currently being considered at the state and national levels. Additionally, the industry's future is closely tied to the future of the government sponsored entities as well as the industry's ability to support the origination needs of the GSEs given the capital constraints.