NMIH - NMI Holdings

[aglittell]

NMIH is a private mortgage insurance provider w/ $90bln of policies in force, earning a 22% ROE last year. The stock has been slaughtered and is currently trading at .8x TBV, down from 2.5x TBV at the end of FY19.

 

Does anyone have any thoughts on how to price the risk of defaults in the privately insured mortgages? Fannie and Freddie have announced 1 year forbearance arrangements with their lenders to prevent mass defaults. However, the private mortgage insurers work with a diversified pool of lenders and to my knowledge, these lenders could still foreclose in the event of default, triggering massive liabilities for the private mortgage insurers.

 

This could be a very attractive entry point if the mass default of homeowners is prevented by gov intervention. If the airlines and other big businesses are getting bailed out while citizens are being delivered helicopter money, I expect homeowners to get relief on mortgages as well.

 

Appreciate any thoughts.

 

[abitofvalue]

NMIH is a private mortgage insurance provider w/ $90bln of policies in force, earning a 22% ROE last year. The stock has been slaughtered and is currently trading at .8x TBV, down from 2.5x TBV at the end of FY19.

 

Does anyone have any thoughts on how to price the risk of defaults in the privately insured mortgages? Fannie and Freddie have announced 1 year forbearance arrangements with their lenders to prevent mass defaults. However, the private mortgage insurers work with a diversified pool of lenders and to my knowledge, these lenders could still foreclose in the event of default, triggering massive liabilities for the private mortgage insurers.

 

This could be a very attractive entry point if the mass default of homeowners is prevented by gov intervention. If the airlines and other big businesses are getting bailed out while citizens are being delivered helicopter money, I expect homeowners to get relief on mortgages as well.

 

Appreciate any thoughts.

 

NMIH probably insures only Fannie / Freddie loans. highly highly doubt they are doing much in the non-agency private space given its a tiny portion of the market anyway.

[lemsinge]

This industry is getting hit very hard right now, yet I believe the cynicism is overdone. NMIH & ESNT are two companies that have no legacy exposure, some of the best reinsurance & ILN coverage in the industry, and primarily high FICOs (avg. is 750) and lower LTVs (mostly in the 80% - 95% range). While there will be delinquencies I believe they will be primarily driven by other areas of the housing market and these guys will ultimately see lower portfolio losses than what we witnessed in 08/09. Could be wrong on this with all of the uncertainty out there...

 

They don't touch FHFA & VA loans. Technically, they compete with them (all though they charge more). They give mortgage insurance to higher quality borrows than those at FHFA or VA. Definitely uncertainty in that department since their is no agreed upon plan. Some mortgage insurers have recession relief programs, or have adopted the stance of Fannie/Freddie, but nothing uniformed as of yet.

 

What concerns me is PMIERs (Industries equivalent of regulatory capital). Everybody in the industry is likely to fall below regulatory capital, which gives investors the risk of a capital raise at depressed prices. Historically, regulators have waived PMIER requirements for mortgages that are affected by hurricanes or other natural disasters. Will regulators waive these requirements/reduce them for the time being? The industry is calling for it but it is unclear if that will be the case.

[abitofvalue]

 

They don't touch Fannie & Freddie loans. Technically, they compete with them (all though they charge more). They give mortgage insurance to higher quality borrows than those at Fannie or Freddie. Definitely uncertainty in that department since their is no agreed upon plan. Some mortgage insurers have recession relief programs, or have adopted the stance of Fannie/Freddie, but nothing uniformed as of yet.

 

 

Are you saying PMI doesnt touch Fannie and Freddie loans? cause if so, thats just wrong.  Fannie/Freddie loans make up 95%+ of their books.

 

[lemsinge]

 

They don't touch Fannie & Freddie loans. Technically, they compete with them (all though they charge more). They give mortgage insurance to higher quality borrows than those at Fannie or Freddie. Definitely uncertainty in that department since their is no agreed upon plan. Some mortgage insurers have recession relief programs, or have adopted the stance of Fannie/Freddie, but nothing uniformed as of yet.

 

 

Are you saying PMI doesnt touch Fannie and Freddie loans? cause if so, thats just wrong.  Fannie/Freddie loans make up 95%+ of their books.

 

 

Edited. Meant to say FHFA and VA as I believe these authorities provide there own insurance/guarantee.

[abitofvalue]

 

They don't touch Fannie & Freddie loans. Technically, they compete with them (all though they charge more). They give mortgage insurance to higher quality borrows than those at Fannie or Freddie. Definitely uncertainty in that department since their is no agreed upon plan. Some mortgage insurers have recession relief programs, or have adopted the stance of Fannie/Freddie, but nothing uniformed as of yet.

 

 

Are you saying PMI doesnt touch Fannie and Freddie loans? cause if so, thats just wrong.  Fannie/Freddie loans make up 95%+ of their books.

 

 

Edited. Meant to say FHFA and VA as I believe these authorities provide there own insurance/guarantee.

 

yes that is right.

 

In addition to PMIERs - which is a real almost existential problem.. and 70% discount (similar to hurricanes) may or may not be enough depending on DQ levels, the other issue is just income statement dynamics.. the companies will need to provision for DQs and higher claims.. which will drive up loss ratios.  I dont know that the market is prepared for 100%+ loss rates.  LT you may be right  (prob are) that claims wont cause similar pain as 2007/8 when half the industry went effectively bankrupt...  You are still going to be saddled with excess reserves, lower origination volume etc. You have to also include risk of dilutive capital raises... if you like MIs not sure NMIH is best positioned.. arguably ESNT which has scale and clean books is better.  If you truly are confident on claims.. MTG/RDN are already at .4-.5 BV offering interesting value.

[lemsinge]

 

yes that is right.

 

In addition to PMIERs - which is a real almost existential problem.. and 70% discount (similar to hurricanes) may or may not be enough depending on DQ levels, the other issue is just income statement dynamics.. the companies will need to provision for DQs and higher claims.. which will drive up loss ratios.  I dont know that the market is prepared for 100%+ loss rates.  LT you may be right  (prob are) that claims wont cause similar pain as 2007/8 when half the industry went effectively bankrupt...  You are still going to be saddled with excess reserves, lower origination volume etc. You have to also include risk of dilutive capital raises... if you like MIs not sure NMIH is best positioned.. arguably ESNT which has scale and clean books is better.  If you truly are confident on claims.. MTG/RDN are already at .4-.5 BV offering interesting value.

 

Agreed on the income statement issues. I believe this industry typical begins booking reserves after two delinquent months, i.e. end of April/early May. To my understanding, since these loans are only in forbearance, the losses are all going to be GAAP losses, with the potential for reserve releases in subsequent quarters assuming this does not turn into massive defaults. Yes this obviously impairs book value, but for how long? No one really knows but market pricing seems to point to at least a handful of quarters.

 

Also while its extremely difficult to model this I have read street research that DQ rates will need to hit higher than 15% in Essent's book for a capital raise related to PMIER, assuming the GSE's approve a 70% reduction. 70% across the board seems way to high, so this is likely to be lower, assuming this even does happen (which is the elephant in the room). Even a 40-50% is likely more than enough since DQ rates were between 11-12% during its peak in the housing crisis.

 

Regarding ESNT vs. NMIH. Is ESNT's book cleaner than NMIHs? NMIH has seen lower DQ rates in comparative vintages then ESNT. I'm unable to find ESNT's CCAR results, but would be curious how they comped to NMIH's.

[lemsinge]

Earnings out, likely one of the better scenarios given the environment. Will see how the market reacts with the amount of volatility in this name over the last few weeks.

 

https://ir.nationalmi.com/news-releases/news-release-details/nmi-holdings-inc-reports-first-quarter-2020-financial-results

 

Most interesting things from the call in my view:

40% Of April NIW is refinancing driven, vs. 29% in Q1 2020 and 24% in Q1 2019. Pricing in April was also 20% higher with tighter credit standards. This could be read both ways. one being that refinancing activity is covering drop in new home purchases, or two, they are still somehow able to write attractive policies on new home purchases (60% of NIW). Probably a mix of both. I expected NIW to drop off a cliff during Q2. NMIH also believes competitors are in similar position pricing wise

 

Delinquency Rate as of April 30 is 43bp. They briefly mention of those who are accessing forbearance programs, that many actually paid in March. As such, delinquencies won't substantially ramp until back half of Q2 as most forbearances began in April. 

 

A survey of the mortgage industry shows that the growth rate in new home forbearances is slowing down. It seems management believes peak forbearances will be somewhere in q2. 

 

They don't expect to breach PMIERs at all, in part due to what they expect to be lower delinquencies, its reinsurance/ILNs, and the 70% haircut on PMIERs from FEMA. Excess PMIER capital is currently $157mm and expected to increase at $70mm per quarter based upon the current run-off profile of the portfolio. Specifically mentioned they can still be above PMIERs even if portfolio defaults are higher then current forbearance rates seen from the GSEs aggregate portfolio.

 

Someone on the call asked for an estimate of the total claims rate given the scenario. I forget exactly what management said but did hear they expect a max 3%, as they believe it is unlikely for defaults to actually lead to claims in this crisis.

 

I am not sure I heard this correctly, but the CFO said NMIH received ~$450mm in cash in Q1, part in due to general business operations and part from a good chunk of its investment portfolio maturing. Also mentioned a $30mm accounting gain from rally in interest rates. Wonder how/if they are reinvesting that cash flow...

 

Overall, i feel quite confident going forward. I do believe they are ignoring the risk of a potential second wave prolonging this out into later half of the year and/or 2021. That would definitely cause issues sans further helicopter money

 

[ContrarianValue44]

Wondering if anyone has any new thoughts regarding NMI Holdings. Looks very attractive at today's valuation, but trying to figure out what an increase in both interest rates and inflation would mean for PMIs over the mid to long term.