Enact’s CEO on recession worries, post-IPO changes and more

June 21, 2022 9:37 AM

Vanja Savic

Among those that have gone public in the last two years, private mortgage insurer Enact Holding is doing better than the originators whose stock prices have tanked from their starting point.

Enact priced at $19 per share. It closed at $21.53 on June 17 — after ranging between $18.76 and $25.85 since going public.

It’s refreshingly good news after five years of uncertainty about the company's future. Genworth Financial, which still owns a majority stake in the mortgage insurer, originally considered breaking off the business back in August 2016, prior to agreeing to an ill-fated acquisition attempt by China Oceanwide.

After four-plus years of delays led to the deal unraveling, Genworth turned to its "Plan B", the sale of 19.9% of the rebranded Enact. But volatile stock prices for the other publicly traded mortgage insurers forced the IPO to be postponed for four months.

Timing is everything and Enact has benefited from a growing home purchase market, which is the primary use case for its product. In the first quarter, the company had net income of $165 million, with new insurance written of $19 billion. That was the second smallest quarter-to-quarter decline in NIW.

Rohit Gupta, Enact's president and CEO since 2012, guided the mortgage insurer through the uncertain times. He discussed what's changed at the company since the IPO and how both the company and its industry are moving through the current market for home buying while preparing for rising delinquencies, which could ultimately lead to claims payments.

Questions and answers have been edited for length and clarity.

How is it going since you've become a standalone company now? What benefits has that given you?

I would say the journey has been very good. For a period of time, we were in a kind of holding pattern, so that created a level of uncertainty in terms of our strategy. Post-IPO, that was seen as a positive by the rating agencies that we had a lot of clarity on our future and by our customers. We started breaking into customers who have not done business with us in the previous four-and-a-half, five years. We have been driving results in line with our expectations or better than our expectations. Our insurance-in-force grew 10% year-over-year. On the balance sheet side, we ended the quarter at 176% PMIERs sufficiency, at $2.3 billion of excess capital. I would say this journey has been very good. And while the environment is evolving and dynamic, we continue to navigate through it on a good basis at this point.

The China Oceanwide deal at first seemed to be an overhang on your new insurance written. Now that you're spun off, that seems to have worked itself out and you're able to build those relationships, correct?

While we were going through the China Oceanwide transaction, there were customers who were concerned about our credit rating. Bank customers or credit union customers are sensitive to ratings because they actually portfolio a portion of the loans with mortgage insurance and they use ratings as a criteria for financial strength. Then there were some customers who were concerned about the strategic future of our business, whether we were going to be owned by a private entity or we were going to be a public company. At the first quarter earnings call, I made comments during my prepared remarks that we continue to see traction with customers who have not done business with us for either of those reasons. We think that we can be a participant in the market that is proportionate to our history. Our market share has been generally stable, we have been in that 16 to 18% range. And now obviously on a post-IPO basis, getting the benefit of ratings and strategic clarity, it's been more on the higher side.

Has the use of black box risk-based algorithms leveled off some of the pricing wars that the PMI industry had seen in the past?

What we saw in the first quarter was a lower frequency and lower magnitude of price moves by competitors. A lot of different moving parts are in the market so the pricing is very granular and very kind of risk-based. But at the same time it tells us that the market is heading toward stabilization.

Now that the forbearances are ending, plut the general economic downturn, are you concerned we will see a big uptick in the delinquent inventory in second, third and fourth quarters?

We still feel that the housing market continues to be very strong. We also see that the labor market is very strong, where there are more jobs in the market than candidates applying. So in 2022, we are generally optimistic about cure activity from pandemic-related delinquencies. Servicers are working with those consumers to make sure that they have the right option to maximize the probability of curing. As far as the likelihood of recession is concerned, as monetary policy continues to tighten, we see an increasing probability of recession in 2023. But in 2022, it still feels like the economy is very strong. Consumers not only have good jobs but in addition during the pandemic, they actually accumulated a lot of savings. That tells us that in the near term consumers should be able to navigate through this environment. But obviously, we will need to monitor how these things change as we head towards the end of 2023.

Purchase volume is expected to grow this year, especially as millennials and Gen Zers enter the market. For the PMI business in general and Enact in particular, are you seeing a larger share of loans coming in that require mortgage insurance because the consumers are not putting down 20%?

At this point of time, it's too early to tell. We are obviously watching the volume very carefully. First quarter MI volume was much more driven by November, December and January originations and applications. So interest rates had still not reached to the level that we are at right now [in late May]. Obviously we saw some impact with borrowers extending the rate locks and things like that. But in the second quarter, we're keeping an eye on volume. And right now we don't have enough data to see what consumers are really doing. As we start getting second quarter numbers, both for MI and for originations, we would have a much better idea how this increase in interest rates and higher home prices, offset by a strong labor market, are playing out in terms of the market dynamics.

We're seeing record average home sales prices, and maybe consumers might decide they might be able to put 20% down but let's save a little money upfront and just do 10% now and take an MI policy?

That makes a lot of sense. The risk based pricing in place is very competitive. So if somebody has a 15% down payment, has a good credit score, a good debt to income ratio, they can get a very competitive price. And over a period of time as they accumulate equity or accumulate savings, they can actually cancel that MI by amortizing down or by home price appreciation. So, that is definitely possible.

And the discussion regarding a 25 basis point cut in the FHA premium is coming back around again. Those talks have been there for the last year plus since the Biden administration came into power, but is this now still a concern or just less of a one now for MI companies?

I think it does have an impact on MI companies but it's more nuanced than it used to be. This has been on the table since January of 2021. But then this January, the Department of Housing and Urban Development and the Federal Housing Administration basically issued a statement saying that they were pleased with the health of the fund, but at the same time they wanted to be cautious. And at that time, what we had heard was the rate cut was delayed until a new director was in place. And then obviously they were waiting for some reconciliation of the delinquencies. Now that they have the new commissioner in place with Julia Gordon confirmed, it's a matter of what they want to do from a policy perspective. From the MI industry side, we have much less overlap with FHA than we used to. The MI industry operates at much higher FICO scores and more moderate LTVs where FHA primarily operates at 97% loan to value and lower FICOs. So when the overlap between our markets is lower, a change in price is going to have less impact on our market. We think that the impact on my market in 2022 could be a low to mid-single digit percentage.