Friday, December 31, 2010

Private MI Cure Rate

There is an ominous being, creator of all in my world. Call him my Boz. Or -by no means after the fashion of men in their projection of themselves onto their ideas of greater power, which only a heretic would attribute to a nature that makes it difficult to conceive of anything better than one's self- I'll just call him Tapley.

Tapley -since we are done with philosophy- spoke with Steve Smith -head muckity muck at PMI- for a handful or two of minutes in early March. At that time, he told the CEO of PMI he had compiled MICA cure rates since 1989 and noticed that the late 80's and early 90's were all above 100 percent as interest rates came down (until 94) and the economy and real estate markets rebounded. He then asked Mr. Smith if such rates could be repeated. Mr. Smith said -off cuff- that a repeat of such rate performance would require an unemployment rate 1 percentage point lower than consensus projections.

Here's the data Tapley referenced:

Period    Cures    Defaults    Ratio
1989    231,505    218,693    105.9%
1990    237,408    219,983    107.9%
1991    232,598    223,442    104.1%
1992    229,647    207,352    110.8%
1993    212,944    200,776    106.1%
1994    251,182    249,292    100.8%
1995    257,201    285,265    90.2%
1996    297,950    327,629    90.9%
1997    337,067    360,038    93.6%
1998    351,438    383,041    91.7%
1999    207,313    218,565    94.9%
2000    298,534    374,754    79.7%
2001    399,003    471,159    84.7%
2002    499,719    562,860    88.8%
2003    512,127    568,315    90.1%
2004    433,657    517,560    83.8%
2005    408,189    517,900    78.8%
2006    415,101    519,834    79.9%
2007    411,845    624,076    66.0%
2008    516,838    884,231    58.5%
2009    686,353    1,091,960    62.9%

Well, here we are at the end of 2010. Unemployment has done anything but outperform this year and the MICA data virtually guaranty a better than 90% full year number. YTD the rate is 94.25%. Given the state of the labor and other markets, that's pretty darn good. And though it isn't above 100% I don't think Smith or many others would have expected such a high number given the backdrop.

I didn't post the Smith interview to question his expertise. He is an expert. And looking back at all the costly capital raising by his counterparts in the industry, they probably wouldn't have expected this good of performance either. Rather this is a great example of how pessimistic leaders, analysts, and investors have become. Pessimism and optimism play a big part in cycles. Our expectations determine the prices we will pay for assets as well as the earning power of those assets. Could they also reflected loss reserves? I think so. Who cares? Its all an interesting observation of human nature but otherwise I could give a shit. Until I consider the how that is just one factor that is a symptom and cause of the magnified pessimism focused on the private MI industry (and for that matter financial guarantee industry more broadly). That makes me care.

Update: YTD through Nov. here:

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