Fitch Ratings suggests its outlook for the US mortgage insurance sector is deteriorating due to expectations for a slowing economy in 2023, with an increase in unemployment and potential pricing corrections in the housing market.
In its sector outlook, Fitch also considers the forecast of a mild recession, which is expected in mid-2023.
Further, though the unemployment rate is anticipated to remain near historic lows through 2022 at 3.7%, it is expected to rise to 4.7% in 2023.
Fitch suggests that a slowdown in job growth and rising unemployment next year would worsen mortgage borrowers’ ability to stay current on their loans, raising the level of mortgage insurance claims.
Christopher Grimes, Director at Fitch, added, “However, a strong US labour market and post-pandemic home equity build-up remain supportive of stability in the US mortgage insurance sector in 2023.”
Also factoring into Fitch’s deteriorating outlook for the sector is national home prices, which it states are likely to see further corrections and worsening affordability next year.
Grimes added, “The frequency and the severity of mortgage insurance losses could intensify if a material decline in home prices emerges broadly across the US.
“Positively for mortgage insurers, delinquencies across all household liabilities remained low in recent quarters, and household debt service and leverage continue to be relatively low compared with historical standards.”
Meanwhile, Fitch also notes that mortgage insurers could find reinsurance costlier, with rates likely primed for an increase next year.
It writes, “Companies that tap mortgage insurance-linked notes to sponsor new transactions as they write new mortgage insurance may find investor appetite lacking during a period of market disruption, adding to the cost of risk transfer for the mortgage insurers reliant on them.”
