Is It A Good Time To Start Insuring Mortgages?

More

Bloomberg reports that start-up mortgage insurer Essent Group is optimistic about its business prospects. Goldman Sachs and JP Morgan are too -- they're part of a group of investors that put $500 million equity in the new firm. Given the market landscape, I think that's probably a very smart investment.

Essent's CEO, Mark Casale says:

"We feel like the market is starting to turn around," Casale said. "Our timing is actually very good," he said. "Guidelines are tighter, underwriting has been much better over the last couple of years. We believe it is going to be a very good market."

Quite right. The mortgage market has collapsed. Even if it isn't on a vast, upward trend, its losses for new originations at this point will probably be limited for the foreseeable future. And since underwriting standards generally require lower loan-to-value ratios, higher down payments and better overall credit, losses should be minimal. Meanwhile, insurers can probably get away with charging higher premiums than in the past, using recent mortgage market experience as an example of the kind of potential losses that they're guarding against.

(High Revenue) - (Low Cost Base) = No-Brainer

To make matters even better for Essent, think about its competition -- or lack thereof. Arguably no industry has taken as bad a beating over the past few years as mortgage insurers. The industry has suffered incredible losses, rating agency downgrades and near collapse. Their balance sheets are still reeling. Their reputational risk is probably irreparable. That means two things: the amount of guarantee volume the established insurers can afford is probably limited, and fresh healthy entrants will be very attractive to mortgage investors.

The big question is whether Essent would do any better in a future housing market crash. After all, its CEO comes from Radian -- one of those insurers that suffered billions in losses. The reality is that this "new" company will probably be made up of a lot of the old employees from those mortgage insurers that failed to make accurate risk calculations. The hope must be that they've learned a thing or two over the past few years. Of course, even if they haven't we won't find out until another epic housing market collapse, which is probably at least several decades off.

Jump to comments
Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
Get Today's Top Stories in Your Inbox (preview)

Is Technology Making Us Better Storytellers?

How have stories changed in the age of social media? The minds behind House of Cards, This American Life, and The Moth discuss.


Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Is Technology Making Us Better Storytellers?

The minds behind House of Cards and The Moth weigh in.

Video

A Short Film That Skewers Hollywood

A studio executive concocts an animated blockbuster. Who cares about the story?

Video

In Online Dating, Everyone's a Little Bit Racist

The co-founder of OKCupid shares findings from his analysis of millions of users' data.

Video

What Is a Sandwich?

We're overthinking sandwiches, so you don't have to.

Video

Let's Talk About Not Smoking

Why does smoking maintain its allure? James Hamblin seeks the wisdom of a cool person.

Writers

Up
Down

More in Business

Just In