KBW Sees Most Mortgage Insurers Outperforming in Second Quarter Earnings
Broker/dealer investment bank Keefe, Bruyette and Woods (KBW) expects "a very important event" for mortgage insurers in the form of second-quarter 2010 (Q210) earnings. Positive seasonal mortgage performance and insurance claim trends of Q110 gave way to "meaningful" underlying data that might provide insight into whether a credit shift is underway, according to KBW commentary released today ahead of the earnings season. "While employment trends, home price stabilization, and a pullback in Federal Housing Administration (FHA) market share are all key components to the long-term strengthening of the mortgage insurance industry, we believe delinquency trends are the most important near-term driver of company performance," KBW said. KBW retains its rating of four major mortgage insurers -- MGIC Investment Corp (MTG), PMI Group (PMI), Radian Group (RDN) and Old Republic International (ORI) -- lowering expectations of earnings-per-share only for Old Republic International in light of higher incurred losses in the firm's mortgage insurance business: KBW added that "recent industry share weakness in light of financial reform on Capitol Hill is, in our opinion, misguided if the driver is concerns over the FHA ultimately picking up market share as the only game in town following its 5% capital retention exemption in the legislation. We firmly believe that the regulators will move to include GSE conforming loans as part of the 5% provision." As of Q210, the industry is transitioning away from the seasonal positive credit environment fostered by tax returns at the beginning of the year, which mortgage borrowers may use for payments. So far in the quarter, KBW said delinquency and mortgage insurance claims have so far remained in line with, and sometimes performed slightly better than, expectations. KBW expects reserving trends to slow and even turn favorable for some mortgage insurers as the reduction in overall delinquencies continues alongside positive loss mitigation activities like the Home Affordable Modification Program (HAMP). Cure rates have trended modestly downward, dropping below the 100% level in the latter part of the quarter as the volume of workouts through HAMP and other loan modification programs declines from recent peaks. Additionally, unemployment and falling house prices continue to weigh on the outlook for mortgage insurers and spur fears of a double dip in housing. Write to Diana Golobay. Disclosure: the author holds no relevant investments.