Ratings agency news flow has been heavy over the past month. This is just the latest and what I feel to be extremely significant. Despite the stock prices of the mortgage insurers being near zero, they still play an important function on many levels.
Kind of like the Bond insureres (Ambac and MBIA) near failure reeking havoc in the structured finance world, the mortgage insurer’s failure could hit everything else. Without mortgage insurance the individual mortgage units do not have the supposed credit support that the owners or the ratings agency thought, setting them up for significant losses.
I can’t count how many times I have heard a CEO over the past year and a half say ‘oh, but that pool of loans all have mortgage insurance’. But now that the defaults are soaring and classes of loans that never were viewed as ‘high-risk’ such as Jumbo Prime are being downgraded by the ratings agencies, are the mortgage insurers safe? Were the premiums high enough on Jumbo Prime for example to cover losses never expected to be so large? How can either be.
Also, if the mortgage insurers are somehow taken out of the picture it would significantly impact mortgage lending going forward because you would be unable to get a loan over 80% loan-to-value. Either that, or the banks would have to sharply raise mortgage rates in order to compensate for the risk.
Always be conscious of the nasty feedback loop in which we find ourselves…higher rates equal lower home prices. Lower home prices equal increased pressure on home owners and more loan defaults and foreclosures. More foreclosures equal more supply and lower home prices. And on and on and on.
*URGENT – On a last note, if I am not mistaken Radian is now the last insurer going over 90% loan-to-value in ‘declining market’ regions, which happens to be just about every populated area in the nation. I wrote about it on August 4th (click here for story). If Radian experiences further trouble they may scale back to 90% as well on new business. This means that even if Fannie, Freddie or other lenders go to to 95%, lenders won’t do the loan over 90% because they can’t obtain insurance.
As a result of this post, a long-time friend just sent me a note saying he talked to a Radian rep and they will be falling in line with the other mortgage insurers, cutting LTV’s to 90%, by October at the latest. This means rates go up for the borrower so banks can self-insure or Fannie Mae and Freddie Mac will only be doing 90% LTV loans in the majority of the heaviest real estate markets in the nation.
I believe the mortgage insurers represent significant financial sector and housing market risk that the market has not factored as of yet. -Best, Mr Mortgage
Wall Street Journal: S&P Downgrades Units of Three Mortgage Insurers
Standard & Poor’s Ratings Services downgraded its credit ratings on the units of three mortgage insurers, reflecting its expectations for increased claims and concerns about the profitability of insured mortgages originated this year.
The ratings firm, a unit of McGraw-Hill Cos., added that its projected claims for mortgages originated in 2006 and 2007 indicate that the volatility of mortgage insurers’ operating results is significantly greater than S&P assumed before the deterioration in the mortgage and housing markets.
S&P expects the 2008 vintage will generate a moderate underwriting profit for most mortgage insurers, but the significant uncertainty in the mortgage and housing markets suggests an underwriting loss is possible.
The ratings firm lowered its grades on units of Old Republic International Corp., PMI Group Inc. and Radian Group Inc., also pointing to unfavorable comparisons of the companies’ results for the first half of the year with S&P’s forecasts.
The units of PMI and Radian saw their ratings cut by two notches, to A- and BBB+, respectively, while Old Republic’s ratings got a one-notch downgrade to A+. Radian’s new rating reflects below-average credit quality. The ratings of the parent companies were also downgraded. PMI’sratings are subject to additional downgrade, withS&P noting it would likely lower its ratings another notch or affirm them with a negative outlook within 30 days. Continued.
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