OLDWICK: U.S. based rating agency, AM Best has revised its market segment outlook on the private mortgage insurance segment to negative from stable, as the COVID-19 pandemic has introduced uncertainty in the viability of the primary and secondary markets for mortgages.
The mortgage market is considerably healthier than it was during the 2008 credit crisis, and the private mortgage insurance segment in recent years has generated strong operating results due to positive macroeconomic conditions, improving home affordability and better underwriting standards.
However, in its new Best’s Market Segment Report, “Market Segment Outlook: US Private Mortgage Insurers,” AM Best notes that the COVID-19 pandemic has progressed from a health crisis to a liquidity crisis, and may turn into a solvency crisis for the balance sheets of individuals and corporations alike.
This could have serious consequences for private mortgage insurers, given that their business and the fortunes of the U.S. economy are inexorably linked.
Key factors weighed in the outlook revision to negative include: a rapid deterioration in U.S. macroeconomic conditions, including an increase in the U.S. unemployment rate; higher mortgage delinquency rates that likely will impact reserves and earnings; an expectation of higher credit losses; diminished access to reinsurance in the mortgage insurance-linked securities market and potentially higher costs in the traditional reinsurance market; and a potential decline in new insurance written.
According to the report, private mortgage insurers will not know the extent of mortgage delinquencies until they receive their updated reports from servicers; however, delinquencies are sure to increase due to a spike in jobless claims, and an anticipated double digit contraction in gross domestic product for the second quarter of 2020. The coming weeks and months also will reveal the long-term effects of the Fed’s recent emergency rate cuts and the $2 trillion CARES Act on mortgage rates and the economy.
COVID-19-related forbearance programs by Fannie Mae, Freddie Mac and the Federal Housing Administration can help mitigate the liquidity problems of individual borrowers and limit foreclosures. However, investors in mortgage-backed securities still must receive their payments, which are derived from the cash flows of individual mortgages, some of which may be in forbearance.
Mortgage servicers will have to advance the principal, interest, taxes and insurance premiums necessary to keep mortgages current while borrowers are in forbearance. This may cause liquidity problems for some servicers if the forbearance take-up rate is high and the duration of the pandemic crisis is long, possibly resulting in systematic risk to the mortgage industry. Mortgage market industry participants are hopeful for a comprehensive solution to avert such a risk to the mortgage distribution pipeline.