Sector outlook for the U.S. mortgage insurance market is based on underlying economic fundamentals expected in 2024, relative to 2023, according to Fitch Ratings report.
Continued strong profitability in the face of a slowing economy has led Fitch Ratings to revise its 2024 sector outlook for U.S. mortgage insurers to neutral from deteriorating, according to Fitch’s outlook report for the sector.
Utilizing traditional reinsurance and mortgage insurance-linked notes (MILN) to manage capital and reduce aggregate risk will be a key strategy for mortgage insurers.
After falling out of favor in late-2022, five of the six U.S. mortgage insurers have issued MILN transactions in 2H2023 totaling roughly $1.4 bn of reinsurance limit and private mortgage insurer eligibility requirements capital support.
According to Fitch Ratings, stronger headwinds brought on by a slowing U.S. economy and falling home prices will weigh on U.S. mortgage insurers next year, according to Fitch Ratings’ 2023 outlook report for the sector, which shows ‘deterioration’ predicated largely by a mild recession that Fitch economists are projecting in mid-2023.
The sector outlook reflects expectations for a slowing economy in 2023, with a modest increase in unemployment and potential pricing corrections in the housing market, offset by stable insurance in force, driven by increased persistency.
Mortgage insurers reflected future economic uncertainty with pricing increases in 2023. The sector outlook considers Fitch’s forecast of a mild recession expected in mid-2023.
The forecast for the unemployment rate is to remain near historic lows through 2023 at 3.7%, but is expected to rise to 4.7% in 2024.
With more new business being written across the industry, Fitch expects that MILN transactions will continue to be issued in 2024.
We expect unemployment to rise modestly next year, which will likely lead to an equivalent rise in borrower defaults
Chris Grimes, Senior Director Fitch
“However, strong borrower credit characteristics and favorable home equity build-up for the majority of homeowners should moderate the frequency and severity of ultimate mortgage insurance claims.”
With a recession looking less likely, national home prices will remain generally stable in 2024.
New mortgage borrowers will continue to face affordability challenges from high interest rates, though strong demand for housing and constrained inventory with many current borrowers locked in to low interest rate mortgages will help to curb broad pricing declines.
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
Chris Grimes, Director Fitch Ratings
However, a strong U.S. labor market and post-pandemic home equity build up remain supportive of stability in the U.S. mortgage insurance sector in 2023.
Also factoring into Fitch’s deteriorating outlook for the sector is national home prices, which are likely to see further corrections and worsening affordability next year.
The frequency and the severity of mortgage insurance losses could intensify if a material decline in home prices emerges broadly across the U.S.
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.
Mortgage insurers could find reinsurance costlier with rates likely primed for an increase next year.
Companies that tap MI-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.