Fitch: Private U.S. Mortgage Insurers Face Negative Outlook for 2009
January 14, 2009
NEW YORK--In a report published today, Fitch Ratings states that the outlook for private U.S. mortgage insurers remains negative.
The negative outlook on the U.S. private mortgage insurance industry's ratings reflects the challenging business environment with respect to the residential mortgage market, which will continue to pose challenges to the industry's risk-adjusted capitalization over the intermediate term. Fitch expects continued loss development in 2009 as 'at risk' insured exposures move through their loss development cycles, national home prices continue to decline, and the overall U.S. economy weathers a recession.
As an industry, mortgage insurers are heavily exposed to the 2007 vintage, which represents about 30% of the industry's risk in force and coincided with a low point in mortgage underwriting discipline. Early 2008 business exhibited similar underwriting characteristics to the 2007 vintage and is likely to post similar performance although business written in the second half of 2008 is expected to perform better as a result of tighter underwriting standards. Mortgage insurers are expected to continue with active loss mitigation efforts through policy rescissions, albeit at a declining rate, and to claim further captive benefits to offset gross incurred losses.
While several mortgage insurers executed capital raising initiatives in 2008, capital constraints remain the most acute problem facing individual mortgage insurers going into 2009. "Mortgage insurers (MIs)face a real risk of breaching regulatory capital limits, which will likely limit the industry's ability to take advantage of new and potentially more profitable business to offset challenges in legacy portfolios. For certain standalone MIs, holding company liquidity may be at risk from lending covenants tied to net worth and risk-to-capital," said Roger Merritt, Managing Director.
The long-term success of the MI industry will depend on its ability to weather the current crisis, which could be materially influenced by various mortgage market and economic stabilization initiatives currently being considered at the state and national levels. Additionally, the MI industry's future is closely aligned with the future of the government sponsored entities (GSEs) as well as the industry's ability to support the origination needs of the GSEs given the MI's capital constraints.
To enhance its view of capital adequacy, Fitch is currently in the process of updating its mortgage insurance capital model. "This updated version will leverage Fitch's RMBS analytical tool - ResiLogic - and will allow for a more granular assessment of risk layering within insured portfolios by region, product and documentation status, for example," said Davie Rodriguez, Director.
The full outlook report, titled 'U.S. Mortgage Insurers 2008 Review and 2009 Outlook - Continued Losses and Capital Demands' is available on the Fitch Ratings web site at www.fitchratings.com.
Fitch Ratings, New York
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