Genworth Financial says deteriorating economic conditions, foreclosures, Basel III and regulatory changes are just a few of the factors that could adversely impact the company and the overall private mortgage insurance model in the future.
Genworth disclosed those risks in its annual report to investors Wednesday.
Genworth, like other mortgage insurers, remains in a holding pattern when it comes to the question of what lawmakers will do with Fannie Mae and Freddie Mac in the future—and that uncertainty remains a disclosed headline risk in the insurer's annual report to investors.
The firm believes demand for private mortgage insurance in America could plummet if laws are enacted that reduce the need for government-sponsored enterprises to obtain credit enhancements on mortgages with above 80% loan-to-value ratios. Offering credit enhancements on those types of deals creates significant amounts of business for mortgage insurers, Genworth said in its annual report.
"The FHA has also streamlined its down-payment formula and made FHA insurance more competitive with private mortgage insurance in areas with higher home prices," the mortgage insurer wrote in its annual report. "These and other legislative and regulatory changes could cause demand for private mortgage insurance to decrease."
Genworth also noted that the economic struggles of Americans could snowball into mortgage defaults that insurers have to cover, creating an ongoing risk for the industry.
When running through its routine list of potential risks, Genworth also outlined its concerns about the international Basel III capital requirements, which were enacted to ensure systemically significant banks possess enough capital to cover future risks.
Genworth suggested that Basel III could be a boon for mortgage insurers if revisions to the rules encourage use of mortgage insurance as a backstop to risk and capital management.
"If countries implement Basel III in a manner that does not reward lenders for using mortgage insurance as a credit risk mitigant on high loan-to-value mortgage loans, or if lenders conclude that mortgage insurance does not provide sufficient capital incentives, then we may have to revise our product offerings to meet the new requirements and our results of operations may be adversely affected," Genworth wrote in its report.