In April, Standard & Poor’s downgraded the entire rated universe of private mortgage insurers, and mostly by multiple notches. On Wednesday, the rating agency decided that drastic action didn’t fully reflect just how, erm…challenged this industry really is.
Recall: mortgage insurers provide cover for banks and lenders in the event of a homeowner default on a loan. In an environment of massive consumer deleveraging, rising foreclosures and widespread negative equity, it’s easy to understand why that business model has failed to inspire.
Here’s S&P’s press release on the matter. Any emphasis FT Alphaville’s:
Ratings On Several U.S. Mortgage Insurers Placed On Watch Negative; Loss Results Exceeding Expectations
— The mortgage insurance industry continues to face significant challenges during 2009, to the extent that many mortgage insurers have reported losses exceeding our expectations.
— We believe that the macroeconomic environment may be having an increasingly negative impact on the prime mortgage insurance books, suggesting an elongation of the loss cycle beyond our prior expectations.
— As a result, we are placing the ratings for several mortgage insurance companies on CreditWatch with negative implications.
NEW YORK (Standard & Poor’s) Oct. 27, 2009–Standard & Poor’s Ratings Services said today that it placed its ratings on several U.S. mortgage insurance groups and their core and dependent foreign subsidiaries on CreditWatch with negative implications. These groups are Old Republic, PMI, Radian, Genworth, United Guaranty, CMG Mortgage Insurance Co (CMG), and California Housing Loan Insurance Fund (CAHLIF).
“The CreditWatch placements reflect our view that macroeconomic conditions may have become more difficult for the mortgage insurers since we last conducted an extensive review of the sector in April,” said Standard & Poor’s credit analyst Ron Joas. At that time, we expected that mortgage insurers were likely to report losses through 2010 and possibly into 2011. However, we also expected some mitigation of losses beginning in the second half of 2009 and continuing into 2010.
We believe recent results from MGIC and Old Republic International Corp.’s (ORI) mortgage insurance group may be indicative of an elongation of the loss cycle, and that mortgage insurers are experiencing a sharper and more rapid transition of delinquencies into prime books of business than we expected. The CreditWatch placements also reflect our expectation that those mortgage insurers that have not already reported their third-quarter earnings are likely to report lower results than our forecasts, reflecting this deterioration.
MGIC reported a loss ratio of 331% for the third quarter, compared with a loss ratio of 222% in the second quarter of 2009, owing to a significant increase in the delinquent loan inventory caused by, in part, a sharp transition of delinquencies into prime loans. Similarly, ORI’s mortgage segment reported an increase in its loss ratio to 214% for the third quarter, up from 198% in the second quarter of 2009, because of an increase in delinquency rates.
Claims payments remain below our expectations as a result of the backlog of foreclosures and the moratoria that had been implemented earlier in the year.
In resolving the CreditWatch status of these ratings, Standard & Poor’s will perform a detailed review of the mortgage insurers’ portfolios as well as their third-quarter results. Our review will focus on trends in the transition of delinquencies into prime loans and the extent to which ongoing rescission and other activities may mitigate losses. If we determine that delinquency and loss developments have extended the loss cycle, we will assess the extent to which this has occurred relative to our earlier expectations.
If our review indicates anticipated delinquency development in a mortgage insurer’s portfolio beyond our earlier expectations and we believe the projected losses will not return to the level of those expectations in the near future, we may lower the rating of that mortgage insurer by one or more notches. Where our review would indicate a return to our earlier expectations within the next six months, we may affirm the ratings and resolve the CreditWatch.
Bailout watch, US Federal Housing Administration edition – FT Alphaville
The travails of the financial guarantors – FT Alphaville
Mortgage insurers, the latest link under strain – FT Alphaville (April 2008)