There is more than enough capacity in the system for the remaining private mortgage insurers to handle the current volume of low-downpayment loans originated as PMI and Republic Mortgage Insurance Co. stop writing new business, industry executives feel.
The other real concern going forward is headline risk, which is not only affecting the stock prices of the publicly traded MIs, but also might have an impact on whether mortgage insurance is included in the definition of “qualified residential mortgage.”
It is the relatively short period in which the two companies announced they were stopping writing new business that “added to the difficulty the market has in absorbing the shock. I think the timing of how fast it happened resulted in a greater shock now,” said S.A. Ibrahim, chief executive of Radian Guaranty.
As of press time, Old Republic International, RMIC's parent, had not received regulatory approval to write new business out of a separately capitalized subsidiary. If things stay the same, its risk-to-capital waiver expires on Aug. 31 and it will stop writing policies.
PMI, meanwhile, was placed in supervision by the Arizona Department of Insurance and ordered to stop issuing commitments on Aug. 19. The parent company is actively looking for new capital.
Those two companies combined had an approximate 20%-25% market share, explained Radian Guaranty president Teresa Bryce Bazemore, who added that is an amount the remaining players can absorb easily.
Ibrahim said it was “very sad what happened to two companies that served the industry well and were great peers and great competitors.”
Mike Zimmerman, senior vice president of investor relations at MGIC Investment Corp., said the remaining players in the business, all of which are below the 25-to-1 risk-to-capital level (except Genworth, which is at that mark) have capacity to write business.
“With the low volume of originations, quite frankly there is really not a concern about capacity from the MI perspective,” he said.
The short-term reaction was seen in how investors sold off both Radian and MGIC in the days following the PMI announcement. Both firms hit 52-week lows on Aug. 23, a day when the Dow Jones Industrial Average closed over 320 points higher than the previous day.
This investor perception was “painting the whole industry with the same brush,” Ibrahim said.
On the other hand, for the healthy companies like Radian, he continued, it means it can pick up market share of higher-quality low-downpayment business.
A statement from the newest player in the MI business, Essent Guaranty Inc., notes that it is backed by $600 million in private capital and it “will continue investing its capital and deploying resources fully to support its lender partners.”
Ibrahim added Radian would have to address mortgage lender concerns (lenders being the company's customers) over time. But on the other hand, those same customers are calling Radian and looking to shift business. He said the company's sales team has been told “to take the high road” when discussing RMIC and PMI.
Bazemore said that when Old Republic first made the announcement about RMIC, some of its customers reached out to Radian immediately about doing business with the company. The same thing is happening with PMI customers.
While private MI penetration is slowly regaining ground against the Federal Housing Administration program, it gives those companies that are still underwriting an opportunity to grow their business.
Zimmerman said overlays by the secondary market and lenders are impacting revenue, but he agreed private MIs are regaining market share.
As a result, part of the investor pressure on the common stock prices has as much to do with the lack of revenue growth as with legacy credit costs, he said.
“It does ratchet up the attention that customers are placing on looking at the financials of the MI companies.
“We saw that when the financial crisis first hit. We were getting a lot of requests for counterparty reviews,” Bazemore said. That died down a bit over time, but now customers are asking to go through where Radian is financially.
Ibrahim and Bazemore both have a background in the mortgage banking business, and having been in the customers shoes, Ibrahim said, it is understandable that the larger lenders would need some assurance by doing such due diligence. Smaller originators typically rely on measures such as the risk-to-capital ratio for assurance.
When asked if RMIC and PMI stopping writing new business makes the industry stronger or weaker, Ibrahim said there was a concern from the government-sponsored enterprises and investors on whether there might have been too many companies writing business.
So it could be seen as strengthening the players who remain in the business. In Radian's case, it has not made any secret of the fact there is $630 million in cash at the holding company level that it can downstream if need be to its mortgage insurance underwriting entity.
Zimmerman, when asked the same question, said weaker or stronger “might not be the right adjectives to consider.” It goes back to capacity.
From a headline view, he continued, people don't want to see one that states companies are being shut down for whatever reason. But the reality is the fact that PMI and RMIC are no longer writing business does not affect mortgage originations because there is ample capacity.
Bazemore agreed with this sentiment, stating there is capacity to handle the market as is, and even if it grows. But these events, she continued, could have some troubling effects, especially among those who view them in places like Washington.
Zimmerman noted that high risk-to-capital ratios like at RMIC and PMI does not mean that those companies will not be able to pay their claims.
Meanwhile, people should not forget the homebuyer's place in this discussion, Bazemore added.
Most MIs have adjusted their monthly borrower-paid MIs rates to be more competitive with FHA. “We've spent a quite a bit of time trying to make sure that lenders and particularly loan officers are educated on the fact that it is actually a better deal for their borrower to get private MI than to use FHA,” she said.
