Thursday, August 25, 2011

HAMP: Data that Doesn't Foretell Doomed

Technicians, chartists and that lot are wizards. Whether you believe in them is up to you. But we just have that feeling that the bottom may have been put in for the solvent MI group: especially Radian, MGIC while Genworth offers less volatility and potential return.

Call it a double bottom, capitulation, or just a long awaited piece of good news. The recent market movements have made for an attractive opportunity amongst the three basic asset classes: redeploying capital into mortgage insurance assets and out of bond insurance assets and especially other assets. Not so much as changed in the bond insurance world, and that's why those assets are an attractive relative source of funds. Other assets - for those who believe in holding such things - remain the most attractive source of funds.

That's why this had to be written now.

What needs to be written is that the one (or the one) source of cure data outside of mortgage insurers supports the case for current reserve levels - or lower. Don't get us wrong: the next few quarters will in all likelihood continue to be ugly, with high loss provisions for the group as the delinquent inventory ages and new defaults remain stubborn. But that doesn't lend credit to suggestions that reserves should be 75% of risk in default for loans over 3 month delinquent (a la Barron's.)

The source is HAMP, see the program's press releases here or visit The Dragon's compilation of the latest two monthly reports here.

The data is broken out with more granularity than the MI's reports and cover two categories: loans from canceled HAMP trials and loans from loans not qualifying for HAMP. In all, 2.1M million loans are covered in the canceled loan and non-qualifying loans. The WSJ estimated their are about 6.3M delinquent loans.

For non-qualifying loans, roughly 0.9M of 1.55M or 58% of disposed loans were either current, paid off, modified or on a payment plan. 57% of 0.6M canceled loans fell into the same categories. Roughly 15% of canceled and non-qualifying loans were categorized as action pending or action not allowed. The remainder were in categories that would likely result in a claim - foreclosure pending, foreclosure completed, and short sale/deed-in-lieu.

If this data were extrapolated to the delinquent inventory at MI companies, they would look comically over-reserved. But this is a biased sample. Those loans not counted might tend to be those with the most hopeless borrowers or worthless properties, not to mention foreclosure process difficulties. On the other side of the scale, these numbers don't account for the 90% higher rate of still-current loans out of 657k permanent non-canceled HAMP modifications.

There's more: this data has no accounting for rescission and denials which might benefit claim payment rates to the tune of 15% or more. All of a sudden 50% of delinquent inventory covered by loss reserves doesn't sound so bad. Volatility be damned: we've used this opportunity to load up for the long haul.

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