Over the past six months, private mortgage insurance stocks have gone absolutely bonkers.
Radian (NYSE:RDN), which wrote the most new business in 2012 per Inside Mortgage Finance, has seen its stock price rise 115.04% in the past six months.
That’s right – it has more than doubled since the end of last year. Presently, it’s trading at just over $10 per share, but it peaked above $64 per share back in 2006.
In other words, it’s valued nowhere close to where it was during the housing run-up. Or when MGIC planned to buy the company in a deal worth roughly $4.9 billion back in 2007. However, it’s still relatively good news for the beleaguered mortgage insurer.
Speaking of, MGIC Investment Corp. (NYSE:MTG), which slipped as low as 66 cents per share in the past year, is trading at nearly $5 a share.
Over the past six months, shares have risen a staggering 198.8%, rewarding investors who rolled the dice on the beleaguered mortgage industry.
Still, that’s not in the same galaxy as the $75 it fetched in the mid-2000s.
Another big gainer has been Genworth Financial (NYSE: GNW), which has increased 71.41% in the past six months. It traded above $36 during the height of the market.
Heck, even AIG is back in the private mortgage insurance game, with its United Guaranty subsidiary writing the most new business in 2012 after Radian.
Talk about a revival.
New PMI Written Is Up
One reason private mortgage insurers are doing well is because new insurance written is on the rise.
In total, private mortgage insurers wrote $174.8 billion in new mortgage insurance last year per IMF, more than double what they were able to muster in 2011.
It was the industry’s highest total in four years, around the time the mortgage crisis reared its ugly head and brought these very same companies to their knees.
In fact, some PMI companies didn’t survive the ensuing chaos. Triad Guaranty halted new business in 2008 and is now sailing toward bankruptcy.
Another large mortgage insurer, PMI Group, was forced to stop writing new insurance and eventually sought bankruptcy protection as well.
But for those who managed to ride out the storm, it means more business for fewer players, which should mean more revenue.
However, it should be noted that $43.8 billion of last year’s total came from HARP originations, which aren’t really new policies because the coverage is just transferred to the refinanced mortgages.
This is generally good news for private mortgage insurers because the same borrowers who were in high-risk mortgages now enjoy much lower mortgage rates (and payments), which should cut down on defaults.
Additionally, new PMI applications continue to rise. Back in January 2012, Mortgage Insurance Companies of America (MICA) insurers reported 24,097 applications received.
In January 2013, that number increased to a total of 39,571 applications, close to double the amount of business.
And policies issued increased from 21,904 to 36,923 during the same period, with new insurance written rising from around $5 billion to $10.5 billion.
For the record, MICA only covers data from Genworth, MGIC, and Radian.
Private Mortgage Defaults Falling
When the mortgage crisis ensued, PMI companies lost their shirts as defaults skyrocketed.
These companies pay claims when borrowers default, which has been the case over the past several years.
But as foreclosures continue to decline and home prices quickly rise, defaults will slow.
Speaking of, private mortgage insurance defaults have been steadily dropping over the past year.
Using data from MICA, primary insurance defaults have dropped from 29,348 in January 2012 to 23,538 a year later.
And each month, primary insurance cures, where bad loans get back on track, continue to improve the pool of insurance in force as well.
So the combination of defaults dropping and PMI transferring to lower-rate loans is helping the PMI companies dramatically lower their risk and reduce losses.
At the same time, companies like Radian and MGIC have sold shares to raise capital, further improving their financials.
The Outlook
While this all sounds like great news, it’s clear that refinancing will slow this year compared to last.
Additionally, HARP originations will probably ease, with roughly 2.2 million homeowners already taking part in the program.
Conversely, purchase activity is expected to rise this year, though not by any significant amount.
However, one major PMI killer is going to see its market share dwindle big time. I’m talking about the FHA, which touts mortgages with as little as 3.5% down.
Over the past several years, the FHA has seen its market share surge as conventional lenders and PMI companies shied away from such risk.
In fact, the FHA now controls nearly 57% of the mortgage insurance market, while private mortgage insurers hold less than 20%, per the House Committee on Financial Services.
But that’s all going to change, seeing that the FHA bit off more than it could chew.
In the next few months, the FHA will tighten guidelines and increase annual mortgage insurance premiums, which will allow PMI companies to compete again.
As a result, PMI companies will regain past market share. That shift, coupled with a better book of business going forward could really propel these companies to their former heights. And just imagine if they actually continue to underwrite files properly…
Of course, it all hinges on the supposed housing recovery. Without a legitimate revival, these companies may not be as cheap as they appear. Still, the upside is certainly appealing.