New Risk Transfer Programs Offer Alternative to MI

On Monday, Moody’s Investor Service released its Q2 2018 private mortgage insurers report. In the report, Moody’s notes the potential for change in the mortgage insurance agency brought about by Arch Capital Group and Freddie Mac’s new risk transfer pilot program, Integrated Mortgage Insurance (IMAGIN). An alternative to traditional mortgage insurance, the program will cede 100 percent of risk exposure to multiline reinsurers.

Fannie Mae introduced a similar program for enterprise paid mortgage insurance recently. Each program acts as a substitute to single premium MI policies. Moody’s noted that due to the small size of the single premium market, these two pilot programs would have little impact on the private mortgage insurance (PMI) industry for the time being.

Overall, Moody's analysis indicated that macroeconomic conditions were favorable for PMIs in the second quarter of 2018. Economic growth along with rising home prices and a strong job market meant favorable condition for mortgage credit and PMIs. "Historically low-interest rates, as well as strong demand, are positive trends, but the ongoing inventory shortage still holds origination growth back," Moody's said in its report.

PMIs reported $80.3 billion in new insurance written in Q2 2018, a 14 percent increase year over year, and Moody’s noted that this was the first time new insurance written had passed $80 billion since 2016. Profitability increased year over year as well, up to $1 billion in Q2 2018 compared to $909 million in Q2 2017.

Pre-crisis loans, meanwhile, have made up the majority of losses in Q2 2018. In addition, hurricane-related defaults have increased since 2017, although Moody’s expects default rates to decline while vintage loans run off.

Meanwhile, competition has forced some rate cuts across the industry. MGIC cut its rates by 11 percent as of June 2018 following a slew of rate cuts by competitors. Even in areas where the Federal Housing Administration has a pricing advantage, these lower rates may give some PMIs the opportunity to gain some market share.

For more data, visit Moodys.com.