Ratings agency A.M. Best has revised its outlook on the U.S. private mortgage insurance market to negative from stable, as a result of the widespread uncertainty being caused by the ongoing COVID-19 coronavirus pandemic.
According to A.M. Best, the viability of the primary and secondary markets for mortgages in the U.S. is uncertain, and, despite the segment being in a healthier place now than it was during the 2008 financial crisis, the challenges facing private mortgage insurers is significant.
In more recent years, the U.S. private mortgage insurance space has generated strong operating results in light of more positive macroeconomic conditions, improvements in the affordability of homes and higher underwriting standards.
However, A.M. Best warns that as the COVID-19 pandemic has moved from a health crisis to a liquidity crisis, with potential for this to become a solvency crisis for the balance sheets of certain individuals and companies, there could be some serious consequences for private mortgage insurers in the country.
The revision in the outlook from stable to negative is a result of numerous factors, including the rapid deterioration in U.S. macroeconomic conditions; elevated levels of mortgage delinquency rates; expectation of higher credit losses; reduced access to reinsurance in the mortgage ILS sector and potentially higher costs for traditional reinsurance cover; and a potential decline in new premiums 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,” explains A.M. Best.
At the same time, the coming months will show how impactful the long-term effects of the Fed’s emergency rate cuts and the CARES Act are on both the economy and mortgage rates.
The ratings agency says that coronavirus-related forbearance programmes by the likes of Fannie Mae, Freddie Mac and the Federal Housing Administration, have the potential to reduce the liquidity issues for 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,” explains A.M. Best.
