Negative Outlook For Mortgage Insurers, Says Fitch

Fitch Ratings said today it maintains a negative outlook on the private mortgage insurance industry's insurer financial strength and debt ratings as big losses continue.

The company said the negative outlook reflects a challenging business environment for the residential mortgage market, which will continue for the industry's risk-adjusted capitalization over the intermediate term.

This year the rating firm said it expects continued loss development as "at risk" insured exposures move through their loss development cycles, U.S. home prices continue to fall, and the overall U.S. economy weathers a recession.

Constrained capital levels, Fitch said, are the most acute issue facing the mortgage sector this year, and the risk of breaching regulatory and and/or debt-based risk-to-capital limits is high and crimping insurers' ability to originate new more profitable business.

The company said that mortgages generated in 2007 with weak underwriting along with home price declines are expected to drive losses for the industry this year.

According to the Fitch analysis, mortgage insurers have been improving pricing and underwriting and future business should show better risk/return characteristics. However it said this will be outweighed by continued insured portfolio deterioration.

Also as a positive Fitch noted that insurers have ramped up investigations as to whether banks properly described the characteristics of their loans and have discovered "a significant percentage" of loans "were not underwritten in accordance with the mortgage insurers' underwriting guidelines or were subjected to fraud.

It said this has led to an "unprecedented" amount of claim rescission activity allowing insurers "to avoid a significant amount of losses over the course of 2008 and has served as a partial offset to the overall increase in incurred losses."