Page 44 - The GSE Report March-April 2018

F R E D D I E M A C M JA AR N. U- A A RP YR . 2 20 01 18 8
Ultimately, our sense is that this structure is more of an experiment than a new world order. With that being said, we caution that Fannie Mae could announce a similar pilot in the weeks ahead given natural competitive dynamics between the two GSEs....
...The Impact on Private Mortgage Insurers Will Be Highly Dependent on the Size and Success of the Pilot
Shares of mortgage insurers traded off ~10% [on March 12] following information reaching the market that Freddie Mac is launching a pilot program, which circumvents traditional mortgage insurers on lender paid mortgage insurance (LPMI), in favor of a panel of reinsurers. ...In all but the most dire scenario, we find that legacy MIs still have significant upside from their current stock prices. We favor MGIC as our top play because Radian’s overexposure to nonbank lenders could make it more vulnerable to disruption from the Freddie Mac pilot. We are not downgrading stocks, adjusting estimates, or lowering our price targets. In order to become negative on space, we need to see evidence that the program moves from a small pilot into a severe threat.
The Pilot is Small and Focused on a Narrow Portion of the Market. Freddie Mac has stated that the pilot is unlikely to issue more than 3% of total industry NIW over the next
12 months and is focused solely on the lower return LPMI business. Reports are that the pricing is at a ~20% discount to published LPMI rate cards, but we highlight most lenders already have significantly discounted LPMI rate cards and the magnitude of difference to in market rates is likely much smaller. The program in itself is immaterial to our estimates in the near-term and would need to be significantly expanded to present a major risk to the sector.
LPMI is a Small Portion of the Market. LPMI only represents ~18% of industry NIW, which we forecast to be roughly consistent in the future. We find that nonbank lenders are ~2.5x more likely to utilize LPMI than banks because of their marketing programs and thus mortgage insurers with material exposure to that part of the market are most at risk. Radian has the largest identifiable concentration to nonbanks at 72% of NIW in 2017.
Small Negative in a Reasonable Scenario. We perform an analysis and lay out a reasonable scenario where MIs lose half of their market share in the LPMI market. Our estimates in this scenario would decline by 1% to 5% by 2020E, but the reduced estimates
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