In a recent outlook report, Fitch Ratings has adjusted its 2024 sector outlook for U.S. mortgage insurers from deteriorating to neutral, citing continued strong profitability despite a potential economic slowdown.
Fitch’s analysis anticipates a modest increase in unemployment in the coming year, which could lead to a rise in borrower defaults.
However, the report emphasises the resilience of the sector, attributing it to robust borrower credit characteristics and favourable home equity build-up for the majority of homeowners.
The stability in the housing market is a key factor in Fitch’s revised outlook, with national home prices expected to remain generally stable in 2024.
Although new mortgage borrowers may face affordability challenges due to high interest rates, strong demand for housing and limited inventory, coupled with existing borrowers locked into low-interest rate mortgages, is anticipated to mitigate broad pricing declines.
Fitch highlights the industry’s strategic shift towards utilising traditional reinsurance and mortgage insurance-linked notes (MILN) to manage capital and reduce aggregate risk.
After a decline in popularity in late 2022, MILN transactions have seen a resurgence, totaling approximately $1.4 billion in the second half of 2023. With more new business expected in the industry, Fitch predicts that MILN transactions will continue to be issued in 2024.
Christopher Grimes, Senior Director at Fitch Ratings, notes that the U.S. private mortgage insurance sector is well-positioned for stable performance in 2024, backed by very strong profitability. High persistency, lower origination volume, and strong borrower credit profiles contribute to the positive outlook, despite ongoing challenges in home affordability.
Fitch’s rating outlook distribution for the U.S. mortgage insurance sector remains low to mid-investment grade, reflecting the industry’s concentration and high competitiveness.
Insurer Financial Strength (IFS) ratings in Fitch’s portfolio are predominantly investment grade, with a distribution between ‘A’ (Strong) and ‘BBB’ (Adequate) rating categories.
The report identifies interest rate-driven persistency as a key factor offsetting lower originations. While mortgage rates rose in 2023, the “lock-in” effect on current borrowers and expectations of a modest reduction in interest rates in 2024 are anticipated to support higher purchase origination volume.
Despite challenges in home affordability, the credit quality of borrowers on new insurance written (NIW) has been maintained at strong levels, with a focus on conservative risk management.
Fitch emphasises the industry’s ability to adapt to changing economic conditions and anticipates that the resilient housing market will moderate loss activity.
