Is It A Good Time To Start Insuring Mortgages?
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.