The mortgage insurance industry runs on a cycle, and according to a new report from Moody’s Investor Service, it’s currently in a sweet spot
“The performance of mortgage insurers is highly sensitive to the mortgage credit cycle and housing market conditions. In addition, the typical monoline structure limits diversification, amplifying the impact of stressed conditions,” the report stated.
For example, it stated, “The financial crisis of 2008-09 severely affected all US mortgage insurers, proving their individual credit characteristics to be less material to their credit profiles than were the overall macroeconomic effects of the crisis.”
The report analyzes three key attributes of the housing environment that it believes are the main macro factors affecting private mortgage insurers: the demand for mortgage insurance, the generic mortgage loan attributes and the prevailing housing market conditions.
“We believe that current macroeconomic conditions and housing affordability support a housing finance environment that is credit positive for US private mortgage insurers, and is as good as it will likely be for this cycle,” the report stated.
Here's why the three main macro factors are doing well.
1. Strong demand for mortgage insurance
PMIs’ stronger capital profile following compliance with the GSEs’ PMIERs will increase the sector’s viability by validating mortgage insurers’ role as long-term counterparties. Meanwhile, the slow progress in legislating GSE reform maintains the PMIs’ government- granted franchise and supports demand for the time being, but does not resolve the longer-term uncertainty about the drivers of demand for PMI.
2. Generic mortgage attributes
There are significant increases borrower FICO scores and loan-to-value (LTV) ratios in the current environment, versus the pre-crisis years, and with respect to FICO scores, including the 1999 to 2004 vintages that have performed satisfactorily through the crisis.
In addition to the high quality of new originations, delinquency rates on legacy loans have improved significantly, primarily due to burnout, steady house price appreciation and improvement in US employment. However, home equity levels remain below pre-crisis levels in many markets, reflecting the fact that many homeowners are still underwater on their mortgages and present a higher risk of default, either for strategic purposes, or on occurrence of a life event.
3. Prevailing housing market conditions
Good housing affordability and stable macroeconomic conditions are reflected in the single-A score assigned to the “Housing Market Conditions” sub-factor in our rating scorecard.
Low interest rates and moderate HPA contribute to strong affordability: Long-term interest rates have been significantly below their historical average for an extended period of time, and HPA has been moderate, reflecting the slow housing recovery. These factors contribute to a strong level of housing affordability that is still meaningfully better than the long-term average, and much stronger than the pre-crisis peak in 2006.