Refi surge is mostly good for mortgage business earnings so far

The unexpected rise in refinancings during the third quarter affected mortgage industry business results in a mostly positive fashion for the period.

For example, although refis slowed MGIC Investment Corp.'s insurance-in-force growth, much of its recently written book of business that paid off was recaptured because borrowers still needed mortgage insurance for their new loans.

Insurance-in-force grew 6% year-over-year in the third quarter to $218.1 billion, which reflected "a modest slowdown" due to increased refinance activity, said CEO Tim Mattke during the company's conference call.

"However, let me explain why the slowdown is not as pronounced as it has been in other refinance cycles," Mattke said. "The majority of policies that are most exposed to refinancing are written in 2018 and early 2019. Given the relatively short period, these policies have been on the books the underlying home have likely experienced only a modest level of price appreciation. Therefore, many new loans being refinanced need mortgage insurance."

MGIC reported net income for the quarter of $176.9 million, or $0.49 per diluted share, down slightly from net income of $181.9 million, or $0.49 per diluted share for the third quarter of 2018.

MGIC's new insurance written grew to $19.1 billion from $14.9 billion in the second quarter and $14.5 billion in the third quarter of 2018. The third-quarter NIW was well ahead of B. Riley FBR analyst Randy Binner's expectations of $14.2 billion.

At Flagstar, refis made up 56% of the origination lock volume for the third quarter.

While the increase in prepayment speeds affected servicing valuations, leading to a $2 million loss for that business line during the period, gain-on-sale revenue increased by $35 million on a consecutive-quarter basis to $110 million.

"Because of the variable nature of our mortgage operations, we expanded capacity and optimized earnings from our mortgage business without compromising service quality to our customers," Chief Operating Officer Lee Smith said during Flagstar's conference call. "We also maintained a disciplined pricing approach to ensure we focused on generating business in the most profitable channels. We want to maximize revenues, and it's this discipline that enabled us to increase our gain-on-sale margins 35% to 120 basis points quarter-over-quarter."

And for the current quarter, Flagstar also is expecting to produce a high percentage of refinance originations.

"Given our refinance share runs at 7% to 10% above the industry average, we think the outlook will continue to present an opportunity for us as we go into Q4," Kristy Fercho, president of Flagstar's mortgage business, said during the call.

Flagstar reported third-quarter net income of $63 million, up from second-quarter net income of $61 million and third-quarter 2018 net income of $48 million.

Stewart Information Services, reporting results for the first time since its proposed acquisition by Fidelity National Financial collapsed, had net income of $66.1 million for the third quarter, up from $17.6 million one year prior.

"I am pleased with our results this quarter given the timing of the merger termination announcement. I would like to commend our people for their focus on delivering these results and providing our customers with exceptional service during a time of significant uncertainty," said Stewart's new CEO Fred Eppinger in a press release. "While refinancing orders benefited from rate-related tailwinds, our operating results were solid across the board, with year-over-year growth in direct commercial, residential and international operations, and sequential growth in our agency business."

Opened orders during the third quarter totaled 111,345, compared with 86,469 for the same period in 2018. Nearly all of that growth came from refis, which increased to 45,387 orders opened from 20,441 in the third quarter of 2018. Purchase orders grew to 60,579 from 59,928 during the same period. (Stewart's U.S. title business also has a small percentage of orders classified as commercial or other.)

Because refi business has lower margins for title underwriters than purchase business, Stewart's average residential fee per file fell by 4% year-over-year to $2,200.