Mortgage insurers will really feel the pinch of lengthy grace intervals

Private mortgage insurers should expect to feel the effects of now-maturing mortgages, which may not heal as quickly as they have with bulk payment reliefs in the past, according to Fitch Ratings in a research report released this week.

When borrowers receive an forbearance after a natural disaster, they are more likely to resume payments on schedule. Many observers have assured concerned service providers that COVID-related indulgences will be resolved in a similar manner, but the two scenarios are very different, Fitch points out.

"Fitch believes the current situation is unprecedented," wrote Don Thorpe, senior director at the rating agency, in the report. "As a result, this historical trend cannot apply.

"There is significant uncertainty about the ultimate economic disruption caused by the coronavirus pandemic and, due to forbearance, there will be a significant time lag before the ultimate insured losses become known."

The company issued a negative outlook for mortgage insurers as it believes they will need to raise additional funds to meet the primary mortgage insurer licensing requirements set by state-sponsored companies, as well as the risk-based capital rules that 25 states have for these companies.

On the flip side, "mortgage insurers have been proactively raising capital to compensate for this, and capital markets have so far been ready to provide that additional capital," said Thorpe.

Mortgage insurers must put funds on hold when they receive a late payment notice from the servicer and only pay claims when a loan is foreclosed.

Due to federal and state enforcement moratoriums, mortgages will remain in criminal loan inventories for a longer than normal period, Thorpe said.

For their part, mortgage insurers have reported that their inventory levels have been declining in recent months, but they are nowhere near where they were before the pandemic.

National MI's criminal portfolio soared from 1,449 mortgages in late March to a high of 14,236 on August 31. As of November 30, the portfolio had fallen to 12,532 mortgages.

Essent Guarantee had 31,950 loans on November 30, up from 33,656 the previous month. At the end of the first quarter, Essent had an inventory of 5,841 loans.

At the end of June, Radian had 69,742 criminal mortgages on its inventory. By October 31, the latest available data had dropped to 59,604. As of March 31, there were only 19,781 mortgages.

Before the pandemic, MGIC's inventory consisted of 27,384 mortgages. The latest data is as of October 31, and inventory levels at the time were 61,521, compared to 64,418 on September 30 and 66,626 on August 31.

Another factor that can mitigate potential losses for mortgage insurers is rising house prices, which make it more likely that a distressed borrower can sell the property for more than the loan is due.

On the other hand, increased job loss could lead to new loan defaults and the lower cure rate that Thorpe was concerned about.

"Economic indicators have improved a bit since the worst pandemic," said Thorpe. "However, uncertainty about the strength and timing of economic recovery, unemployment, mortgage cure rates, and house prices create significant volatility in potential loss outcomes."

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