Mortgage Insurer Delinquencies Rise

Loan delinquencies are on the rise at U.S. mortgage insurance companies, which is likely to send their loss ratios soaring, according to a study by Fitch Ratings in New York.

Fitch's findings were contained in a special report that examining recent trends in the domestic business of the mortgage insurance market.

It said that the overall delinquency rate of primary insurance in force went from 3.9 in 2004 to just under 4.4 percent in 2006.

First-year mortgage delinquency rates in three FICO risk evaluation scoring categories for mortgages ranged from below 1 percent to 7 percent, Fitch said.

The rating firm said it expects that the overall level of loss reserves will continue to escalate over the next few years as the weaker vintages of 2005 and 2006 mortgages begin to reach their peak default years.

Fitch said it would not be surprised if future annualized loss reserve rates increased by more than 50 percent in upcoming years compared to the very low levels seen in 2005-2006, which could translate into an industry loss ratio in excess of 60 percent as compared to 42 percent for fiscal-year 2006.

The rating firm said U.S. private mortgage insurance companies, whose core business is insuring the risk of losses arising from defaults of residential mortgage loans, are among the industry participants that have attracted increased attention following the problems in recent months in the residential mortgage lending market–particularly in the market for subprime mortgage loans.

The firm said its study contains comparative data on recent originations, details on the insurance in force, and performance trends of recent vintages aggregated for all mortgage insurers rated by Fitch.

It also provides some “initial perspectives on potential implications for future performance of these insured books as well as the financial impact on the mortgage insurance industry,” Fitch said.

According to the report, market concerns have been broadly centered on 2006 vintage originations, but to some degree concerns extend to originations of the preceding years' business as well.

At the same time, while the subprime sector has overwhelmingly been the primary concern thus far, some apprehension also exists that problems in the subprime sector may spill over into other sectors of the mortgage market–which comprise the lion's share of the mortgage insurers' volume and insurance in force.

Fitch said it believes that the industry as a whole will be able to manage this more difficult operating environment over the intermediate term without ratings implications, although some companies may be better situated than others.

Partially offsetting the immediate to intermediate negative effects of the current housing market are several positive implications that are emerging or may emerge as a result of it, according to Fitch.

Some of these factors, Fitch said, would include tighter lender underwriting standards, increased demand for the mortgage insurance product, and better pricing given expansion of credit spreads.

The Fitch report–”Across the Board, Delinquencies Are Up–An Analysis of U.S. Private Mortgage Insurance Exposure”–is available online at www.fitchratings.com.