One Bad Vintage Represents 30% of MI in Force.

Byline: Brad Finkelstein

New York-The outlook for private mortgage insurers for 2009 remains negative as they will have to deal with loans they underwrote in 2007, a report from Fitch Ratings here declares. The 2007 vintage, "a low point in mortgage underwriting discipline," the rating agency said, represents 30% of the industry's risk-in-force.

Furthermore, the business underwritten in the early part of last year has similar characteristics to that 2007 book and is likely to have a similar performance. The business written in the second half of 2008 is expected to perform better than the first half as a result of tighter underwriting standards.

There will be "continued significant loss development" this year for the MIs as losses are likely to shift from weaker underwriting segments and geographic regions experiencing the most dramatic home price declines to the broader prime market, especially if unemployment rates continue to rise.

Fitch also said capital constraints remain the most acute problem facing the surviving mortgage insurers.

"Mortgage insurers face a real risk of breaching regulatory capital limits, which will likely limit the industry's ability to take advantage of new and potentially more profitable business to offset challenges in legacy portfolios. For certain standalone MIs, holding company liquidity may be at risk from lending covenants tied to net worth and risk-to-capital," said Roger Merritt, Fitch managing director.

The excess of loss captive mortgage reinsurance arrangements, which Fitch noted had once been seen as a drain on the profits of mortgage insurers, are now helping them to mitigate the losses on their book of business. According to Fitch, at the end of the third quarter last year, the private mortgage insurers had an aggregate of $5 billion ...