The mortgage insurance industry continues to face significant challenges during 2009, according to Standard & Poor’s. The rating agency believes 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 S&P’s prior expectations.
As a result, the rating agency is placing the ratings for several mortgage insurance companies on CreditWatch with negative implications. These groups are Old Republic International (ORI), PMI, Radian, Genworth, United Guaranty, CMG Mortgage Insurance Co. (CMG) and California Housing Loan Insurance Fund (CAHLIF). S&P did not include Mortgage Guaranty Insurance Corp. (MGIC) in this action because of the rating actions it took on Oct. 19, 2009 (downgraded to B+; MGIC Investment Corp. outlook revised to negative).
“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," says Ron Joas, S&P’s credit analyst. “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 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 S&P’s 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.
S&P says it will perform a detailed review of the mortgage insurers' portfolios as well as their third-quarter results. If the review—focused on trends in the transition of delinquencies into prime loans and the extent to which ongoing rescission—concludes that delinquency and loss developments have extended the loss cycle, S&P will assess the extent to which this has occurred relative to our earlier expectations.
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