As an industry, mortgage insurers are heavily exposed to the 2007 vintage, which represents about 30% of the industry's risk in force and coincided with a low point in mortgage underwriting discipline. Early 2008 business exhibited similar underwriting characteristics to the 2007 vintage and is likely to post similar performance although business written in the second half of 2008 is expected to perform better as a result of tighter underwriting standards. Mortgage insurers are expected to continue with active loss mitigation efforts through policy rescissions, albeit at a declining rate, and to claim further captive benefits to offset gross incurred losses.
While several mortgage insurers executed capital raising initiatives in 2008, capital constraints remain the most acute problem facing individual mortgage insurers going into 2009. "Mortgage insurers (MIs)face a real risk of breaching regulatory capital limits, which will likely limit the industry's ability to take advantage of new and potentially more profitable business to offset challenges in legacy portfolios. For certain standalone MIs, holding company liquidity may be at risk from lending covenants tied to net worth and risk-to-capital," said Roger Merritt, Managing Director.
The long-term success of the MI industry will depend on its ability to weather the current crisis, which could be materially influenced by various mortgage market and economic stabilization initiatives currently being considered at the state and national levels. Additionally, the MI industry's future is closely aligned with the future of the government sponsored entities (GSEs) as well as the industry's ability to support the origination needs of the GSEs given the MI's capital constraints.
