CARES Act could lead to unexpected situation for mortgage insurers

Private mortgage insurers could be victims of "unintended consequences" from the coronavirus relief legislation, which could result in them needing to hold more capital, a B. Riley FBR analyst report said.

"For mortgage insurers, elevated delinquency expectations resulting from the 12-month mortgage holiday embedded in the CARES Act have raised questions about capital adequacy under the Private Mortgage Insurer Eligibility Requirements," wrote B. Riley FBR analyst Randy Binner. "While MIs have significant capital and reinsurance protections, they would likely rely upon a reporting forbearance from FHFA if nonperforming mortgages increase over 10% of risk-in-force."

Binner's analysis assumes that the delinquent mortgage portfolio of the two mortgage insurers mentioned in his report, MGIC and National MI, will increase to 15% of the book of business. However, he is also factoring in a 70% haircut to the assets normally required to be held against nonperforming loans, in line with what the Federal Housing Finance Agency had done in natural disasters. But that relief has yet to be granted for the coronavirus.

"A 15% non-nonperforming assumption is higher than we would assume in a normal recession because the CARES mortgage holiday likely will create a much larger set of delinquent mortgages," Binner said. "We believe a reporting accommodation is appropriate because 1) the CARES Act is introducing an artificially large population of delinquent mortgages and therefore, 2) this may not be as good a predictor of default, which is the economic event for MIs."

In his analysis, MGIC will have $1.6 billion in PMIERs excess capital, and National MI will have $460 million. His evaluations are higher than projections made by analysts at Keefe, Bruyette & Woods in their stress scenario. But both remain positive for the mortgage insurance industry, as does BTIG analyst Mark Palmer.

Palmer explained that investors have been bailing on the industry's common stock not only due to the increased delinquencies, but also due to declining home sales that would lead to lower amounts of new insurance written. There is an opportunity to buy these stocks given their decline in value in recent weeks, he said.

"However, some observers believe that U.S. regulators may not move on capital relief for the PMIs until questions around the mortgage servicers have been addressed," Palmer wrote. "That linkage was seen on Friday as PMI shares traded down in sympathy with those of the servicers after media reports emerged that members of the Financial Stability Oversight Council led by Treasury Secretary Steve Mnuchin had discussed holding off on creating a liquidity facility to aid the group until they had a better sense of how many consumers would seek mortgage forbearance."

Palmer reported that each of the five mortgage insurers he covers referenced their experience around Hurricane Harvey in August 2017. After the initial influx of unemployment-related delinquencies, most loans cured as homeowners returned to their jobs and policyholders sought to maintain the equity in their homes.

As for Genworth and whether its long-running acquisition agreement with China Oceanwide finally gets completed, in addition to monitoring the long-term insurance care business, investors are going to have to now keep an eye on the U.S. and majority-owned Australian MI businesses and the extent to which they are granted regulatory relief to deal with coronavirus related mortgage defaults, Palmer added.

B. Riley FBR's Binner cut his 2020 earnings per share projections for MGIC by $0.15 to $1.50, and by $0.25 for National MI and Radian (which he otherwise did not mention in this report) to $2.25 and $2.40, respectively. Projections for 2021 earnings were also cut.

Binner also reduced his ratings on both Fannie Mae and Freddie Mac to sell from neutral.

"While a liquidity solution for mortgage servicers is likely in our view, it does highlight the risk profile for the broad guarantees written by Fannie Mae and Freddie Mac. Pressure here could significantly impact earnings and reduce chances of recap and release," said Binner.