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A Primer on Mortgage Insurance and What MI Folks are Doing

Monday, February 29, 2016 - Article by: bcahoone - Global Home Finance Inc - Message


Kevin walks into his boss's office. "Sir, I'll be straight with you. I know the economy isn't great, but I have over three companies after me, and I would like to respectfully ask for a raise."

After a few minutes of haggling, the boss finally agrees to a 5% raise, and Kevin happily gets up to leave.

"By the way," asks the boss, "which three companies are after you?"

"The electric company, water company, and phone company," Kevin replied.

Lenders everywhere are looking forward to a great March given their swollen locked pipelines. As thousands of operations folks descend on Ellie's conference in Las Vegas, regulation will be the focus, and its impact on lenders and consumers. Is the cure worse than the disease? We'll see where TRID takes things. According to the December Origination Insight Report from Ellie Mae, the average time to close a loan in 2015 took 49 days. The average time to close a refinance dropped to 47 days, while the average time to close a purchase transaction increased to 50 days. Closing rates for all loans was 67 percent, while the closing rates for refinances reached the highest level of the year at 63 percent and closing rates for purchases declined slightly to 71 percent.

In spite of only 10-20% of current mortgage volume having mortgage insurance, many industry-watchers believe that the performance of mortgage insurance companies provides a good bellwether for lending in general. Last year things were decent for the mortgage insurance biz although the sector came under pressure as the market focused on price competition. Analysts think that in 2016 this competition will increase and there may be some market share loss for some monoline mortgage insurers. Regardless of individual companies it is good for folks to understand some basic terms.

"New Insurance Written" (NIW) is a good general measure of health. Many estimates for overall mortgage volume see it dropping in 2016, in spite of this current jump in refi volume. Analysts think that as an industry new insurance written will be roughly flat in 2016 at about $215 billion - which would be good if volume actually declines. This reflects the much higher penetration rate of purchase mortgages versus refinances.

"Insurance-In-Force" (IIF) is another good metric. Most estimates indicate that IIF for the industry to continue to grow at a roughly 6% annual pace that we saw in 2015 and stands between $800-900 billion. The growth is being driven by continued growth in the purchase mortgage market.

"Loss Ratio" is also a key statistic. In 2016 one can expect declining losses for the legacy companies and modestly rising losses for newer companies, and residential mortgage credit trends to remain very strong driven by the tight underwriting standards over the past few years and reasonably strong job growth.

What about "Average Premium Rates?" Experts think that declining premium rates for some of the big MI companies are in the cards. (National MI seems to have the hot-hand in pricing at the higher end of the market - but don't expect other MI companies to sit idly by letting that continue especially if they want more market share.) Most expect to see a roughly 10% decline in industry premiums through 2018, which in turn impact the earnings of those companies over future years since it would only apply to new business.

"Market Share" is always in flux - few are happy with the status quo. We may see that market share shifts away from some of the monolines (Radian, Essent, and MGIC) and toward "upstarts" such as National MI. In the third quarter of 2015, for example, NMIH's market share was almost 6%, but 56% of its production came from the single premium channel.

We find that United Guarantyis the "number one" MI company for the fifth consecutive year in terms of traditional New Insurance Written (NIW) according to Inside Mortgage Finance. For 2015, United Guaranty's first-lien NIW exceeded $50 billion. UG President and CEO Donna DeMaio noted that, "In 2016, our focus will continue to be on building on our strengths, including our solid capital base and our advanced technology, to continue to earn our customers' loyalty." Over the past seven years UG "has issued more than 1 million quotes with Performance Premium, saving borrowers millions of dollars in premium compared to rate card prices by precisely reflecting the credit risk of each loan."

For earnings UG, the mortgage insurance subsidiary of AIG, had pretax operating income of $644 million for 2015 - an improvement of nearly 9% over the $592 million of pretax operating income for 2014. As we know AIG has proposed spinning off 19.9% of UG in a public offering. AIG earned $2.2 billion for the full year, but lost $1.8 billion during the fourth quarter. Improvements were due to lower delinquency rates and higher cure rates. The fourth-quarter 2014 income was enhanced by $24 million due to a legal settlement in UG's favor.

For the full year, UG had $50.7 billion of new insurance written, up from $41.9 billion in 2014. However, UG's new insurance written in the fourth quarter declined by 1% to $10.6 billion, from $10.7 billion one year prior. UG ended 2015 with the largest volume of NIW, followed by MGIC at $43 billion, Radian at $41.4 billion and Genworth at $31.6 billion.

KBW's Bose George met with Essent's management recently and did a fine write-up on the impressions. "Management sees the transition to risk-based pricing and flatter rate cards as natural following the finalization of PMIERs and believes that returns remain compelling. We continue to see Essent as a growth story within the industry as its IIF share catches up to its NIW share. We see the industry as a whole as attractive given the sharp decline in valuations.

"Essent...noted that it is not seeing pressure from lenders to roll out a flatter rate card and noted that Essent's market share has remained unchanged for the last few quarters...The company said that while the new flatter rate cards could result in some market share moving to FHA, it remains too early to quantify the impact. Management noted that lenders prefer conventional lending to FHA lending and stronger borrowers will continue to go to the GSEs. Some move towards the FHA in the low end of the market would also help the future credit performance of the MI books of business."

Earnings-wise, Essent Group LTD, based in Bermuda, recently reported net income of $44.5 million in the fourth quarter, more than double the $19 million over the same period in 2014. Flow NIW of $6.0 billion was down from $7.4 billion in 3Q, and an estimate of the company's market share was about flat Q/Q at 12%. KBW noted that, "The single premium percentage increased to 24% from 22% Q/Q, similar to peers. Insurance-in-Force (IIF) increased Q/Q to $65.2 billion from $62.1 billion in 3Q. (New insurance written for the full year totaled $25.9 billion, up from $23 billion in 2014.)

During the year, Essent Group's reinsurance subsidiary reinsured $121 million of risk from Freddie Mac's Agency Credit Insurance Structure and Fannie Mae's Credit Insurance Risk Transfer programs as compared to $43.9 million in 2014.

Of course Arch turned heads when it released its Arch MI RateStar product, "Our risk-based pricing solution is available on any smart device that uses a browser, so you can always get your RateStar premium quotes instantly."

Over at MGIC it is continuing to buy back its own debt. Through early this month MTG has purchased or entered into an agreement to purchase some of its debt securities including $127.7 million par value of 5% notes for $132.4 million and $132.7 million par value of its 9% debentures for $150.7 million. MTG borrowed $155 million from the FHLB to buy back those 9% debentures which will not be retired but instead will be retained by MTG. Makes sense given that the borrowed funds have a fixed rate of 1.91% and mature in 7 years.

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