Page 45 - The GSE Report March-April 2018

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would have a very small impact on our price targets (1% to 2%) because we have already assumed growth will slow in the out years within our valuation framework.
The Downside Case. The mortgage insurance industry is not going to pack their bags and go home in the face of external competition. We think that should this program gain material traction, the natural response would be for mortgage insurers to reduce pricing, eliminate the pricing advantage of reinsurers, and thus cause reinsurers to put their capital elsewhere. We identify two significantly negative scenarios that we believe are highly unlikely:
1. 50% of industry NIW shifts to the LPMI pilot ROEs (levered 10%) and
2. 100% of industry NIW shifts to a 10% ROE. Under the 50% framework, we find that both MGIC and Radian would have 30+% upside all else being equal (Radian at more risk of underperformance given lender mix). Essent and NMI would only have modest upside to our price target. Under the 100% of industry NIW scenario, which we believe is highly unlikely, but sets a floor, we see MIs trading to the 1.3x-1.5x book value level with MGIC having only modest downside (3%). (Mortgage Insurance - Impact From Freddie Pilot, Chris Gamaitoni and Isaac Boltansky, 03/13/18)
Freddie Mac announces enhancement to STACR Notes
Beginning in July, Freddie Mac will make a Real Estate Mortgage Investment Conduit (REMIC) election on a majority of loans securitized in single-family pools.
In May 2017, Freddie announced it was proposing this structural enhancement to its Structured Agency Credit Risk (STACR®) notes to help expand its potential investor base by increasing the participation of Real Estate Investment Trusts (REITs) and global investors. Freddie Mac engaged a number of market participants and their feedback was positive. Earlier this year, the Securities Industry and Financial Markets Association echoed this sentiment, stating that it had “not identified any issues that would impair the TBA eligibility of [mortgage-backed securities] under this new structure.”
PCs will continue to be single-class guaranteed mortgage pass-through certificates, and PC investors will receive the same cash flows as they do today. (Press Release, Freddie Mac, 04/26/18)
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