Grant’s: Time To Buy Mortgage Insurers?

Private mortgage insurers, MGCI Investment Corp. and Radian Group Inc. are back in vogue according to last week’s issue of Grant’s Interest Rate Observer.

The private mortgage insurance industry returned to profit last year, after six years of hefty losses following the financial crisis. The industry is expected to grow over the next few years, and MGCI, as well as Radian, are two top picks on the recovery.

Private mortgage insurers help potential homebuyers close the gap between means and ends. Their issuance has increased in line with the recovery in the housing market. Indeed, as the chart below shows, the percentage of mortgages that made use of mortgage insurance providers came in at just under 35% during the first quarter of this year, almost three times more than the level reported ten years ago.

“Insurance in force” and “risk in force” are two key industry terms. Insurance in force refers to the face value of the mortgages the insurer is exposed to while risk in force refers to the value of the loans the insurer is on the hook for. MGIC and Radian have reported insurance in force figures of $169 billion and $172 billion respectively. Risk in force amounts to $44 billion and $43.4 billion respectively.

Mortgage insurers: Growing market

Mortgage insurers: Troubles behind them

MGIC and Radian have worked hard to put the troubles of the past behind them. In the run-up to the credit crisis, the two insurers were being left behind. Easy credit negated the need for the insurers to write new insurance contracts, and the insurance “persistency rate” (the proportion of customers that remain on the books in any given year) fell to 45% in the mid-2000s, from a high of 78% five years previous.

So, to drum up more business, Radian and MGIC formed a pair of ill-fated joint ventures, which took on the subprime market.

Private mortgage insurers faced a bill of more than $50 billion after the subprime crisis. MGIC alone paid out $15.5 billion, but now these liabilities are behind the company, it has been left with $2.3 billion in operating loss carry forwards.

Today the mortgage insurance market has almost completely recovered from its troubles. The percentage of seriously delinquent mortgages across the country stands at 3.5%, the lowest figure since January 2008. The national foreclosure rate stands at 1.3%, once again the lowest since December 2007.

Mortgage Insurers

Mortgage insurers: Improving outlook

Grant’s goes on to point out that the new regulatory regime for mortgage insurers may seem draconian but is, in fact, extremely manageable. The new regulatory structure requires a risk-in-force to capital ratio of 14:1, rather than the current 25:1. Authorities have softened the blow by giving relief to books of business written before 2009, meaning that MGIC and Radian can easily meet targets with cash on hand.

After the financial crisis the state of the mortgage insurance industry drastically improved, costs fell, returns increased, and the level of risk taken on was reduced. In short, improved underwriting standards coupled with an improving housing market have made this an extremely attractive market to be in.

Legacy losses are finally starting to tail off. As Grant’s reports, MGIC’s loss ratio (losses as a percent of premiums earned) fell to 42.3% during the second quarter of this year, down from 68% as reported in the year-ago period. Radian’s loss ratio hit 20.4% this year, from 25% a year ago. Legacy business was responsible for 94% of MGIC’s second quarter losses while representing only 42.2% of risk in force.