A trio of mitigating factors will prevent a wave of foreclosures when coronavirus-related forbearance ends, enabling private mortgage insurers to thrive next year, BTIG's 2021 forecast report said.
An improving employment picture, higher house prices, and post-forbearance deferrals are major loss reducers, said Ryan Gilbert, an analyst at BTIG who has done coverage of the MI industry. He has a positive view of the industry and estimates earnings per share for 2021 to be an average of 4% above consensus.
An improved, if still challenged, US economy should increase the number of homeowners who can exit the business by restoring their loan to current status, completing a repayment plan, or resuming payments and those who missed at the end of their loan term Add.
In addition, the COVID-19 vaccine and another potential round of federal government fiscal stimulus will boost the job market and make it easier for borrowers to resume payments, Gilbert said.
The deferment of payment is "potentially significant" for harm reduction.
"Given the sharp appreciation in house prices since March, the forbearance option is likely to have minimal impact on many borrowers," Gilbert said. "In the third quarter, 45% of Freddie Mac's forbearance exits were postponed and 10% of Fannie Mae's total forbearance loans were postponed, followed by the reinstatement at 22%.
"Data from government-sponsored firms suggests borrowers and service providers see the value of the deferral option. We expect those numbers to rise as more loans reach the end of their grace period," he said.
The expected shift in 2021 to a buy market driven primarily by first-time home buyers is positive for the MI industry, but Gilbert in particular is optimistic about Essent and National MI, the two companies that have no legacy in the pre-financial crisis book Business. (BTIG covers five of the six active MIs, with the exception of Arch.)
Companies made decisions about the amount of new insurance they took out in 2020 based on their capital levels relative to the eligibility requirements for private mortgage insurers.
But for the next year the PMIER surplus situation – for the companies Gilbert is tracking – is on a similar level and "we believe any company is well positioned to both increase its NAV and a possible increase in arrears in 2021 to cover, "said Gilbert.
Essent and National MI will take market share from the old companies again next year, Gilbert predicts.
"PMI is a commodity product and the advent of risk-based pricing has further realigned the conditions of competition for price," he said.
These newer companies have "access to debt / equity / reinsurance capital and no previous exposure prior to 2009. However, if claims ratios improve faster than expected, Radian and MGIC are likely to have short-term upside for investors" because their respective stocks will traded below book value, Gilbert said.