Mortgage Insurers Healthy

While mortgage insurers have been increasing exposure to “affordability products,” such as interest-only and pay-option adjustable-rate mortgages as well as higher loan-to-value loans, subprime loans accounted for less than 12 percent of the risk in force at the end of last year, according to a recent report from Moody’s Investor Service. Subprime loans, which Moody’s defined as mortgages to borrowers with credit scores below 620, only about 8 percent of policies issued in 2006.

But the low share of subprime exposure won’t shield the sector from higher loss ratios this year, the report, An Examination of Subprime Mortgage Risk Exposure Among the U.S. Mortgage Insurers, indicated. The report focused on aggregate data provided by seven major insurers.

During the fourth quarter 2006, two-thirds of new policies written were for prime loans, nearly a quarter were Alt-A and 10 percent were subprime — a mix that didn’t vary much during the year, the New York-based agency said. Prime mortgages accounted for almost three-quarters of policies in force at the end of last year, Alt-A represented 14 percent and subprime made up12 percent. Alt-A policies have seen the biggest share increase during the past three years.

By credit score, one-quarter of policies written during the fourth quarter 2006 had credit scores in excess of 740, 63 percent had credit scores between 620 and 740 and 11 percent had scores under 620, Moody’s reported. By LTV, 21 percent of policies written during all of 2006 were above 95 percent LTV, 22 percent were between 91 percent and 95 percent, and nearly half were between 81 percent and 90 percent. The remaining share was less than 81 percent LTV.

The current real estate downturn, which was prompted by rising rates — especially short-term ARM rates, mortgage fraud and tightened nonprime underwriting guidelines, is expected to continue into 2009, according to the report. But strong employment, continued consumer spending and the global financial system should help prevent a crash.

While losses could also spike on Alt-A loans, the ratings agency doesn’t expect this to occur. And even though the sector’s income will probably decline this year, Moody’s expects mortgage insurers as a whole to remain profitable and see few downgrades.

“The significant overall orientation toward prime loans should provide a key element of stability for the U.S. mortgage insurers — though the ride may be a bumpy one,” Moody’s wrote. “We also believe that the underwriting controls in place at the mortgage insurers create a key point of differentiation compared to the problem loans in recent vintage subprime RMBS pools.”

Other factors pointing to sustained health are mortgage insurers’ minimal exposure to second mortgages, limited exposure to poorly-performing RMBS pools and fraud exclusions in underwriting policies, the analysis indicated. In addition, only 26 percent of policies in force were made on ARMs and just 2 percent were made on loans with negative amortization.

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of MortgageDaily.com.

e-mail: mtgsam@aol.com