NU Online News Service, March 5, 3:24 p.m. EST
The mortgage-insurance sector is expected to continue to report operating losses well into 2013, as losses on legacy books of business will likely outweigh the profitability generated from more recent business written since 2008, according to Standard & Poor's.
S&P says that continued economy-related struggles caused the mortgage-insurance sector to report operating losses in 2011. "Last year, we believed mortgage insurers had the potential to begin reporting operating profits by the end of 2012," S&P says. "However, the lackluster economic recovery, highlighted by sluggish payroll employment growth and the poor housing market, led to ongoing high levels of new notices of delinquencies (NODs) while preventing greater improvement in cure activity."
The ratings agency says there have been some improvements in the economy on the employment front, but adds that the U.S. housing market remains under significant pressure.
S&P also says that mortgage insurers are subject to regulations requiring that they hold a certain amount of capital. "Most of the mortgage insurers have violated these requirements and cured them with capital infusions, establishing newly capitalized subsidiaries to allow them to continue writing new business, and seeking regulatory forbearance through capital waivers."
But the ratings agency says that as the likelihood for break-even results by the end of 2013 declines, "we believe the ongoing regulatory forbearance will also decline."
Litigation could also put pressure on mortgage insurers as they ramp up rescission and claim-denial activity, S&P says. "While we believe it will take time for these issues to be resolved in courts, the sector's capital position is generally unable to withstand any significant adverse judgments that may come," according to S&P.
The ratings agency notes that PMI Group has been taken over by the Arizona Department of Insurance, and RMIC has received an Order of Supervision from the North Carolina Department of Insurance. While S&P expects to see signs clarifying the potential for break-even in 2013 by mid-2012, "we believe the absence of those signs will not only point to an extension of the mortgage insurers' loss cycle, it may also indicate more mortgage insurers have run out of time."
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