I read with interest today that last week Moody’s Investors Service has given the nod of approval to Genworth Financial Mortgage Insurance and QBE LMI, lifting their ratings from negative to stable.
This is significant because of the role mortgage insurers play in property finance.
Moody’s is a credit rating agency (CRA) that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the underlying debt are also given ratings by ratings agencies. In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market. A credit rating for an issuer takes into consideration the issuer’s credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued.
Lenders Mortgage Insurance (LMI) is a financial guaranty that insures the lenders against loss in the event a borrower defaults on a mortgage.
If a borrower defaults, and the lender takes title to property, the mortgage insurer reduces or eliminates the loss to the lender. In effect the mortgage insurer shares the risk of lending money to the borrower. However, the insurance company may seek to recover the shortfall from the borrower.
Lenders usually require the borrower to pay LMI if they cannot provide a 20% deposit on the property they are wanting to purchase, or if they are applying for a non conforming (low documentation) loan. In some cases the lenders will pay the LMI premium. The mortgage insurance premium is a once only payment that is required at settlement. The premium is calculated according to the amount of the loan, the value of the property, the type of loan and stamp duty.
So the mortgage insurer’s carry a significant amount of risk, arguable more risk than the banks given that without LMI, lenders would normally require 20% of the property purchase price as a deposit, which would mean years of saving for some borrowers. With LMI, lenders are willing to accept as little as 3% and in some cases no deposit from the borrower.
According to a Moody’s vice president and senior analyst Wing Chew, the lift in rating for both Genworth and QBE LMI reflect the companies’ solid market position and effective credit management.
“The change in outlook is based on improvements in the companies’ operating environment and their financial profile, reflecting in turn improvements in demand for mortgage insurance, pricing structures, and profitability,” Mr Chew said.
“The substantial improvement in profitability is due to the restrained nature of the economic downturn in Australia and the rapid recovery in the housing market.”
“Australia has been able to stabilise its financial and credit markets through a combination of monetary and fiscal policies.”
So on the plus side it is encouraging that a credit rating agency like Moody’s has upgraded the status of two of Australia’s largest mortgage insurers. To me it says that they are confident that a lot of the downside risk in Australian property post – GFC is dissipating.
On the other hand the value of such ratings has been widely questioned after the 2008 financial crisis, given it was the rating’s agencies failure to properly assess collaterised debt obligations (CDOs) and similiar financial instruments which led to the credit crisis…