Outlook for the Mortgage Insurers
Is this industry on the ropes, or is relief in sight?
Perhaps no industry has had a more difficult road to navigate in this financial meltdown than the mortgage insurers. As guarantors of the most risky residential mortgage products, those with less than a 20% down payment and many of them nonstandard in a variety of ways, mortgage insurers have experienced extreme stress on capital. Mortgage delinquencies continue to increase at an alarming rate, paving the way for future foreclosures. The fundamental question facing the industry is whether the mortgage insurers have enough reserves to cover the claims.
Is the Worst Yet to Come?
The problem in assessing capital adequacy for the mortgage insurers is that reserves are established on a historical premium-to-anticipated claim basis, which could be considered irrelevant in the current environment. Compounding the issue is that the cure rate (the number of delinquent mortgages that do not result in a foreclosure) is normally more than 80%, well above the 60% average in 2008 that declined to about 50% by year-end. What's more, there is, on average, about one year between the initial delinquency and the ultimate foreclosure, which is when the mortgage insurer pays out on the claim, so it appears the worst is yet to come.
Jim Ryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.