Fitch lowering the ratings boom on the mortgage insurers
"Today's announcement follows previous rating actions taken by Fitch within the MI industry on Feb. 25, 2008. Based on further review of the U.S mortgage market and its impact on the financial and insured portfolio performance of the MI industry, Fitch has grown considerably more pessimistic on the outlook for the sector. This relates greatly to Fitch's view that 2007 will likely prove to be one of the worst underwriting years in the modern history of the U.S. mortgage industry, and recognition that 2007 was a year of rapid growth for a number of key mortgage insurers. Fitch notes that 2007 vintage mortgages are turning delinquent at a significantly faster pace than the 2006 or 2005 vintage years; an early indication in support of Fitch's growing concerns with exposures underwritten in that year.
"The current trouble being experienced in the U.S. mortgage markets has spilled over from subprime into other mortgage products, such as adjustable-rate, negative amortizing, reduced documentation, and second-lien mortgages. The major factors driving the deterioration in mortgage performance indicators has been the poor underwriting process demonstrated by many mortgage lenders the past few years, combined with the continued and accelerating national home price decline which has eliminated the option to sell or refinance a home to avoid foreclosure for many borrowers. Adding to the strain seems to be an increasing willingness for borrowers to 'walk away' from mortgage debt when estimated home values are below their current mortgage balances. This is appearing quite apparent for 2007 mortgages as these borrowers have born the full brunt of home price declines. Fraud has also played a key role.
"It appears the MIs' underwriting processes were ineffective in identifying and protecting against these risks, as the industry aggressively courted new business throughout 2007. As a result, these companies' insured portfolios are now heavily concentrated with 2007 vintage mortgage loans, many of which are very high loan-to-value (greater than 95%) and/or were underwritten to borrowers who provided limited or no documentation.
"The deterioration in the U.S. mortgage market has led to continued sharp increases in delinquencies for all the MI companies, particularly for loans originated in the 2005-2007 vintage years. With reduced options to refinance or cure troubled credits, Fitch believes a greater percentage of these delinquent borrowers will end up in foreclosure in the years ahead which will translate into higher claims and losses over this time period."