In a wide-ranging report covering the mortgage insurance industry, Fitch Ratings said Friday that many mortgage insurers will continue to face capital strains in the next few years as claims associated with the subprime mess and soft housing market exact a toll. Numerous large mortgage insurers, including MGIC and PMI, have begun pulling back dramatically on the loans eligible for policy underwriting, as paid losses continue to mount and the number of borrower delinquencies continues to rise. "Negative net income will have a significant impact on the MI's ability to internally build their capital bases over the next few years," Fitch said in the report, "which is of particular concern given the likely costs and/or challenges to raising external capital in this depressed market environment." From the report:
While the majority of the U.S. private mortgage insurance industry's risk in force relates to mortgages that conform to government sponsored entities (GSE) underwriting guidelines, the industry as a whole does have material exposure to non-conforming loans, both in the subprime and Alt-A sectors, and in many cases with the additional risk of untested loan products layered on top (i.e., negative amortization loans). A large portion of this exposure is housed through the MIs' bulk and modified pool business lines. Additionally, significant portions of these non-conforming loans are geographically concentrated in soft markets such as California and Florida, where home price depreciation has been especially pronounced.
Fitch did say that it expects loans originated in 2008 to be more profitable for insurers, as tighter underwriting guidelines, increased premium rates, and lower defaults should help to offset the negative drag of the 2005 - 2008 vintages -- although the agency also said that current market difficulties "may prevent many of the MIs from effectively taking advantage of these opportunities." The full report is available on Fitch's Web site. For more information, visit