Q1 2020 Earnings Call

in total we have reduced radiant guarantees P Myers Capital requirements by one point six billion dollars as of the first quarter 2020 by Distributing risk through both the job markets and third-party reinsurance execution as noted on press release exhibit l

As a reminder in the first quarter, we terminated our intercompany reinsurance agreement with radian reinsurance resulting in the transfer of six billion dollars of risk from Radio Shack to radian Guaranty along with a $465 million-dollar return of capital from radian reinsurance to radian group and the transfer of two hundred million dollars of cash and marketable securities from radian group to radian Guaranty in exchange for a surplus note following these steps radiant guaranteed now holds all of our traditional mortgage insurance risk and radian reinsurance, exclusively holds our exposure to the gses credit risk transfer programs.

For radiant group as of March 31st, 2020 we maintained 648 million dollars of available liquidity total liquidity which includes the competition two hundred and sixty seven point five million dollar unsecured revolving credit facility was $916 as of March 31st, 2020 and just yesterday. We extended our two hundred and sixty seven point five million dollar credit Facility by 15 months to January of 2022.

During the first quarter of 2020 radian group repurchased approximately eleven million shares of our common stock for approximately 226.3 million dollars including commission under the August 2019 share repurchase program.

And during the quarter we announced the suspension of our share repurchase program by canceling the 10 b51 plan effective March 19th, 2020 the current month purchase authorization expires on August 31st, 2021 and has purchased Authority remaining of up to $199. And now the expected impact of covid-19.

The impact of covid-19 on our operating results is expected to have both short-term and long-term impacts. We expect to experience a short-term impact over the next couple of quarters. When we expect to see higher delinquencies driven by government-supported forbearance programs while we expect these programs to be beneficial in terms of ultimate losses. These delinquencies will trigger both an increase in the minimum required assets factors of P Myers and for our gaap financial statements through our initial estimate of the ultimate claim rate, which will drive higher wage provision expense and higher Reserve levels.

Acted longer-term impact for p Myers will be driven by the overall number of delinquencies and how these delinquencies age or cure.

The expected longer-term impact for our Gap financials will depend on what our actual claims experience on covid-19 based defaults will be relative to our second quarter in a subsequent. Reserve estimates and is Rick mentioned earlier actual claims could take years.

While P Myers is frequently referred to as a capital framework. It is actually an asset based framework that is calibrated to a significant stress scenario and has little or no impact on a gaap financial statements. But rather focuses on the maintenance of sufficient high-quality assets to pay claims.

minimum required asset factors for both performing loans and delinquent loans are defined within P Myers and are expressed as percentages of the risk held

Is delinquent loans age through older delinquency or missed payment buckets, the minimum required asset Factor increases the highest percentage change in asset Factor occurs in the initial delinquency bucket of two to three missed payments where the minimum required asset Factor moves from an approximate six to seven percent level for performing loans up to 55% for initial defaults.

In the FEMA declared major disaster areas. This 55% asset factor is reduced by 70% to 16.5% still a significant increase from the base six to seven percent. So as Rick mentioned we expect to be able to absorb up to 25% of our portfolio and delinquent loans as of June 30th, 2020 depending on the level of holding company resources. We use this is simply the application of the relevant P Myers minimum required asset factor for our projected portfolio with escalating delinquencies at that time relative to our then projected access of available assets over minimum required assets. Generally speaking minimum required assets can be reduced by reinsurance and other risk transfer and available assets can be increased by contributions from holding company to the operating company as well as from birth.

hours of operating cash flows over time

our gaap financial statements are impacted by our own estimates of ultimate losses, not the formulaic and static factors of P Myers. It is critical to understand this difference primarily because movements and P Myers minimum required assets May imply a different view of ultimate expected losses than our own.

It is also important to remember that our initial loss estimates will be based upon the best information. We have at the time to estimate a default to claim rate. However, our initial efforts may be materially different from what ultimately rolls to claim. These estimates are updated in every reporting. And could cause material fluctuations in our provision expense in each. Dead.

Despite the increased.

Risks and uncertainties posed by the covid-19 pandemic the quality of our mortgage insurance portfolio and the steps we have taken in recent years to enhance our financial strength and flexibility in a position does well for an economic downturn and we believe will help us whether the macroeconomic stresses ahead some of these industry and radiant specific mitigants include oil.

Maintaining over $900 in total liquidity at our holding company and no debt maturities until October 2024.

The risk-based capital framework of P Myers has been fully implemented by all mortgage insurers and has increased to the available resources of the industry to withstand stress events.

And radian Guaranty. We have one point 1 billion dollars in the XSP Myers available assets. We also have significant benefit from risk of distribution transactions are more recent vintages and our older vintages have benefited from significant home price appreciation providing another potential barrier to Los.

Loan origination since the last financial crisis have been under written in a more disciplined environment driven in large part by the qualified mortgage loan requirements under the Dodd-Frank Act wage and are as much higher quality than those written during 2008 and prior there have also been significant advancements in the risk-based pricing framework that has helped increase the flexibility of mortgage insurance industry in recent years.

The shift away from a predominantly raped card based pricing model and the increase in Black Box and other pricing Frameworks such as our radar rates tool provides a more Dynamic pricing capability that allows for more frequent and targeted pricing changes throughout the mortgage insurance industry and the ability to respond to macroeconomic shifts more quickly the cause of this month. We at radian have been able to Institute significant price increases in response to the greater risks and uncertainties to the macroeconomic environment resulting from the covid-19 pandemic off and as Rick mentioned there are policy changes occurring now and potentially in the future that will likely support keeping people in their homes and preventing foreclosure.

And while these strategic and systemic defenses will not provide complete immunity to the expected upcoming negative effects to our results. We believe that we are much better positioned to absorb the impact of economic stress then in the global financial crisis. I will now turn the call back over to Rick

before we take your questions. I'd like to remind you of a few items. The first quarter of 2020 was a very strong quarter for the company. We believe that we are well-positioned wage negative economic environment resulting from the covid-19 pandemic was strong team owners capital and radian group available liquidity plus the other recognized future value at our insurance portfolio off while the market has changed dramatically in our team is working currently remotely. We believe we have the resources and capabilities to continue to deliver our broad array of products and services to our customers to come out of this environment in a strong position. I also want to note that while we are managing our business in The New Normal. We were also focused on making sure that we support our communities through thoughtful and high-impact charitable contribution programs both as a company and in support of our employees.

Operator we are ready to take.

questions

Thank you. If you have any question, please press * then 1 on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key if you're using a speakerphone, you may need to pick up the handset before pressing the numbers. Once again, if you have a question, please press * then 1 on your touchtone phone. And our first question comes from from Boa.

Hi, good morning. And thanks for taking my questions. Hope everyone is staying safe and healthy. Just wanted to start with you know on the forbearance loans and you know default the claim assumptions. I understand it's probably too early to give specific numbers, but could you maybe just contrast the range that you see between maybe what you saw in the crisis on your you know Prime loans and the crisis in terms of default to claim versus what you see coming out of a natural disaster, you know, just to help us frame. What a reasonable range of outcomes can be on that default to claim.

This is Derek in terms of the crisis. It's a little hard to use out of the proxy one given the fact that that was a housing-led down and also fundamental prices were significantly overvalued at that point also the underwriting quality and credit quality was much worse. So on those defaults they roll at a much higher level.

I think that a better policy is if you look at Hurricane propensities to roll the claim after default those were significantly lower and if you look at kind of our office. With Harvey and Irma, um, you would see kind of a role that claim rate more than that 2% range. So the question I don't think you would use the financial crisis as probably a good place for a road to claim. What you would look at is just a bit of a combination of I would say a natural disaster induced. So you would see that as a bit of a proxy for a little to claim but am not part of this you also have real economic stress, but it's important to keep in mind that that economic stress is on much better quality loans with better underwriting and also am much more temporary in nature in terms of its this location from an economic perspective, which would also push down the probability that the those loans would also log

He rolled the claim. So that's why I think there's look at more of a run-of-the-mill recession and also more kind of our disaster experience and it's kind of a combination of those things that you use to get ultimate. I would say roll the claim rate.

On this no, that's helpful. Thank you. And then just to another question. I was curious. Do you are there any statistics that you can share around just borrow a level industry exposure that you may have, you know, it's just, you know securely certain segments of the industry off the economy are more impacted. So I'm just trying to you know, as we think about, you know recovery rates and you know how quickly the default the claim can come down just from a bar if there's any yeah, it's a little hard to I would say give you a statistic. I think what we can see and I think we see some of this in the data is those who are apply for unemployment in the initial wave or probably more skewed towards income segments that would be less represented in terms of the mortgage borrower universe and less represented in our portfolio. So that makes it somewhat difficult to use traditional measures like unemployment and translate that into a default rate because it's skewed a bit wage.

From our portfolio same thing from an industry perspective. It's more constant.

Traded in kind of the sectors such as you know restaurants Leisure and so things like that also are going to be less represented and that's important because each other thing we do is we take that into account in terms of our pricing. So as we think about our pricing adjustments what we're doing from a geographic perspective is increasing pricing more on a relative basis and those deals where they have more concentration in those sectors. So I would say compared to probably history. I would say that the unemployment forbearance is probably its kind of pushed away from I would say our segment more so than has historically been the case.

This is Rockabye. I might just send you one, to Derek's comments, which he alluded to which is really just trying to understand the split between red and homeowners and that unemployment number and you know, given Derek's characteristic of kind of that group. We really are watching the rental rates as much as we are kind of forbearance because I'm from all the statistics we can see as you know, this is this is hitting renters, you know, potentially, you know, pretty hard as well. So again more information, and you know, we all need more damage, but I think it's something that we're watching very carefully as well.

Oh that that is helpful. Thank you. And then just last question before I I'll jump back into you, but I had a question on that disaster relief, you know on like 70% or the third point the 30% multiplier. If you will a dog is Oscar relief Capital charge discount. There's a line in your tank you about the potentially interpreting that less favorably I was just curious. What do you mean by that? Cuz I guess understanding like, you know, when you look at the P miles it's there. So what is up for interpretation on that? Thank you.

Yeah, I think that in terms of the risk factor is some of it has to do with just the application of the haircut going forward. So to get a little bit technical. Here's the way it works is you essentially identify the loans that are given that initial haircut and you look at the event and you go 30 days before and 90 days after and you that's your population. The one question is how long that multiplier continues to apply and if you look at the P Myers what you look at our FEMA declared disaster areas that are subject or eligible for individual Assistance office. Now, this is less significant a risk for us because at this point about 90% of our risk is actually in FEMA declared disaster areas eligible for individual assistance and what that matters is to the extent. It's in one of those areas and it's under a forbearance plan. Then it you get that haircut of 70% for as long as it continues in forbearance dead.

So one question is what happens with that remaining 9% that's not in areas that are eligible for individual assistance. So I would say that is probably I would say the risk of them that right now and you have some technical aspects such as you know, in this case as opposed to a hurricane that has a point in time where you can give a date for the event. This is more of a rolling natural disaster. So, where do you kind of pig the event again more kind of technical nuances? I think in terms of the particulars within P. Myers is what we're talking about at this point.

Okay, just to clarify.

Does not days in the risk that they would say, hey don't know this 70% This isn't what we meant when we said natural disaster like that would actually be they'd have to make a change to payment as to say that like, so it would be safe to assume that it does apply because it's designated and right. Yes pretty clear in the language. These are declared disaster areas. It's very clear, which was around subject. I am eligible for individual assistance. So it would have to be a fundamental change with respect to how they're approaching the tires for for that change to be made fun just to thank you. Thank you. Thank you.

And our next question comes from both George from KBW.

Good morning. Just wanted to follow up again on Capitol. You know, it looks like this year with the forbearance, you know, the discount multiplier. You guys are very well positioned obviously for a month straight, you know going sort of moving forward into next year. Once these forbearances are are over, you know you if there's a organic recession we're delinquency is a very high, you know, they could get a need for Capital, you know again, so I'm just curious. How are you thinking about that or their thoughts to you know, look at ways to potentially sort of capital available if it's necessary, you know in the future.

Sure, thanks for this is Frank. Yeah, I think when it comes to the capital planning associated with this with the environment that we're in right now, we're going to continue to be flexible and we're going to continue to position our capital in a way where we can be nimble and address the situation as it evolved. And so that could be you know, further utilization of reinsurance violence. You know, when you look at our available resources just as they sit today from a p Myers standpoint, you know, we have technically access available resources of of two billion dollars, which is roughly sixty 68% cushion for us right now. So, you know is this continues to develop will will respond accordingly and make sure that we are positioned well, but wage

Yeah, I think fortunately is is there just went through the the haircut certainly helps and and I think we'll just have to see even from a governmental policy standpoint things continue to evolve. I think there is just a general appreciation for the fact that the they're they would like to have people stay in their homes. And so if it's a foreclosure holiday or something like that, they could use that of course helps us out from an ultimate clean perspective. And and so we'll just see how how all of these things align and operate on a go forward basis. But you know, the range of possibilities that we're looking at is that and we just want to make sure that we can look as far forward with the best information that we have available and make sure that we're well-positioned again to maintain the strike the strength and flexibility that we've demonstrated over time. But okay that makes sense. Thanks. And then cuz she going back to the comment. You said you've made about price increase dead.

Can you give us an idea of the magnitude of the increases and also just in terms of the RO is that essentially?

Are getting the same are we but the higher prices just incorporate the higher risk now in terms of returns.

Yes, this is Derek. Yeah, that's a good question. So that is the right way to think about it. So as we think about it from a pricing perspective or adjusting the pricing factoring in kind of the new economic environment and the expectation that we're going to have an increase certainly, um in delinquencies and we're going through a stress. So our attempted to adjust pricing to kind of get back to that targeted return wage. Um, so as a result, we adjusted prices significantly across the board and then in certain segments and you can think about this from a credit Dimension perspective you can think about it from a geographic Dimension perspective, you know, we increase the pricing relatively more or less based upon that view of our risk to kind of get back to that expected return. We're looking at generate and what we found in the industry is based on the data. We have we think that our competitors have also increased pricing. I think some of our competitors have perhaps done it.

More targeted a more targeted basis. Like I said, we've targeted certain segments but we've instituted pricing across increases across the board. I would say so we continue to monitor that off cuz again trying to get a sense as to where the competitive Dynamics are. And again, we're always looking for opportunities where we can find spots to maximize the economic value. We're generating on that new age business. That's why it's very useful to have our new pricing tool radar rates, which is very Dynamic flexible. We can make those pricing changes on a targeted basis makes it much easier to manage the portfolio and make kind of quick changes when economic conditions change.

Okay, and it's actually just significant is that sort of over 20% You don't want to do not want to be precise about what that means. Yeah, I think generally you've been seeing price change. I would say just industry-wide ranging. I would say anywhere from 10 to 50% increases depending upon again, very dependent upon kind of the credit sectors that P trying to Target. So I would say significant double-digit price increases we've been seeing

Okay, great. Thanks.

Our next question comes from Mackenzie Erin from zelman.

Thanks, good morning, pulling up on the on the pricing changes can also give us an insight into the underwriting changes that you've made and I know there have been some products restrictions off in any way to quantify what percent of volume that was done in 2019 May no longer be eligible. Nothing for my credit overlay perspective, you know, we stopped underwriting investor loans cash out where he flies those were pretty small percentages. I think in aggregate those have been running at definitely less than 1% of the overall portfolio took a lot of the underwriting changes again is trying to balance this new environment where there's certain difficulties posed such as you know, verifying employment income assets. So a lot of it's been kind of around that so documentation requirements around that shortening the length of time in which documents can need to be updated and things like that. The other thing is just wage.

National delegates around the underwriting

Again, this new environment. There's certain things underwriting activities. You might traditionally do for instance on the appraisal side that make it more difficult. So a lot of the changes have to do with making sure will appropriately dealing with from a risk perspective and I would say we're working closely on this with the GSE in terms of working with them. I think we've seen some changes in terms of automated underwriting systems as well. I would say overall though in terms of you know, the portion of business we were doing that's no longer eligible. I don't think it's significant damage, but I think in terms of just the underwriting process has and taking out some of the tail risk, that's what we've seen a movement. The other thing I would point out is just from an overall risk perspective risk of layering perspective. And if you look at that, that's a continuation of a trend. We've really seen over the last I would say year-and-half. If you look at the percentage of our business coming in with below 6 a.m.

A brave a 95 LTV greater than 45 DPI that's significantly increased over the last year and perhaps even more importantly layered risk where we have the combination of those factors has dramatically decreased. So I would say a continuation also important is very good position to be in in terms of the more recent books of business that might have benefited from less significant home price appreciation has been really among the highest credit quality books of businesses that we've ever underwritten.

That's helpful. Thank you. And then I can gears on the Real Estate Services segment. Can you talk about expectations around that business this year given the lower transaction environment and how we should be thinking about the contribution. Thanks McKenzie happy to comment on it. You know, I think we've we've hit the year running from a business point of view within a sale of Clayton and really kind of refocusing our business around the core set of real estate assets as we think of it focus on growing our title valuation asset management and just other Real Estate Services, but really largely focused around real estate transactions, and I think you know, we pointed Eric and Brian is the co-heads of that business there that segment and integrated wage each of these for product groups our sales and operations and technology and marketing teams. So whereas whereas focused on I would call it and some of those authors

The model line players that are either evaluation focused or title focus. Our teams are focused on winning and developing, uh, you know, kind of a disrupted position in the office and their respective marketplaces. So we we're not really, you know, given some of the uncertainty in the marketplace. We're not at a point where we would provide guidance today wage, but I would say the momentum in those businesses is really very strong in line of you know, some of the refinance activity evaluation title. We're seeing seeing those businesses grow, right and we would you know, hopefully as we get a little bit further in the year and and we see this environment settle down we can give a little clearer guidance, but the momentum is strong the job done a remarkable job we so I like to say we we threw them all out of the office in mid-march and said, you know go do growing levels of volume, you know, crossed our title and valuation wage.

This is in and and do it in a very new setting and they've done remarkably well, but I'd say we're seeing a great deal.

Of receptivity from RMI clients, we're increasing the penetration of our Mi clients across multiple products and growing the number of new clients. So today, you know, we think narrowing the focus off on the highest value elements. As I said, you know the past quarter after we sold the Clayton business really focusing on the high-value opportunities where we think we can be a next Generation player in these Mom. It's you know are very very closely connected to our Mi partnership. So it's you know, right now I'm I'm actually very pleased with the progress we're making and you know, hope to have good news continuing good news to report in the future quarters.

Well, thank you. Thank you. Next question comes from from s i g.

Hey, good morning, everyone. Hey Craig, I want to go back to your initial comments around the 25% DQ rate in Cambridge compliance on that. Are you home number one assume the initial asset Factor on the on the 3 the 3-month delinquency or do you run that all the way out to the one year and then a second where where does that 2 billion available? Not you know, I'm talking like you've got you've got the the 68% push and when you layer and all the debt and everything else it's on tap. How does that factor into that calculation as well?

True Jack the the 25% number really is derived from an estimate at June Thirty. So if you think about where we stand right now with you know, the bank once he's associated with forbearance programs by June Thirty. They're only in that missed two to three payment bucket. So uh for the most part, so that's that's probably the largest assumption in the calculation of that number. And so that's that's what we're contemplating there and and Thursday. So the the resources that were there were attributing to the absorption of of that number would be the full resources which are shown on slide nineteen month the estimated resources at June 30th as well. So it's important to remember that the June Thirty number projected which would include the the P Myers cushion at the opco wage.

Get holding company available resources. Um, and the the credit facility. Okay. Thanks for that. And then Rick at the uh, the sixty billion number. Um, can you talk to us about what you're seeing in April on a volume basis, maybe either year-over-year or split between purchase and refund obviously, refi is going to be much much bigger number than most people thought three four months ago. Um, kind of give you that confidence into the sixty billion full-year number.

Yeah.

Jack thank you, you know we we we feel very good about the greater than I think we said more than sixty billion. Um, which uh is um, you know as we close today, you know, seeing as I mentioned in my script that you very strong new commitment pipeline, um, obviously refinances are playing a bigger role in the marketplace month. And as you as you can see just from you know purchases pulling back as listings or pulled out, you know, we may see that bounce back through the year. But right now we're assuming that there's going to be a growing percent of refinances that are reduced percentage of purchase loans in the overall market. So today we are seeing increased activity across refinances. We have a strong commission pipeline part of part of the question and and I and I as we think about it is what is the second half of the year look like how does it develop, you know, does you know what what time?

Happens is the government starts to have to fund all the stimulus. You know, what happens the interest rates what's happens to the purchase market? So I think we're we're taking a uh, you know, we're taking a kind of a a cautious view of the future if you will and and thinking through how it will evolve and I would say today based upon what we see we feel very comfortable about the dead more than sixty billion and hopefully at the 2nd at the end of the second quarter, you know, Derek and I can give you, you know, a better view of of how the year is shaping up and but we think it's too early to have a view of the second half of the year.

Okay. It just real quick one more if I could sneak one in on expenses and run where you had some volatility expense line came in better this quarter and I think there were some incentive and and and and someone timers but you know as we go into this and everybody sort of activates their their their transition plan, there's some text and that probably goes up but then there's some Offset, you know, the sales rep and out entertaining and that sort of thing. How do we think about expense run rate through the the balance of the year on a quarterly basis?

Sure. So Jack last quarter, you know, we were sort of calibrating to a $70 quarterly number after the sale of Clayton. I would say it's probably too soon to tell what the what I'll call them the permanent impact associated with the the change in the landscape. So, you know to what extent life does get back to normal whatever that is, you know, I would say that number is probably a good number to go with but it really is just too early to tell right now and and and make any type of permanent adjustments.

Okay. Thanks guys. Good luck.

Thank you. Next question comes from Mark debris from Berkeley.

Yeah, thanks. Just a follow-up question on the the 25% default Assumption High. Do you have a sense for you know why the default rate can go without you having to distribute any of the excess, um, you know resources at the holding company down to two rating guarantee is it as simple as bulb is like that's about half of the available, you know, excess assets that it would be somewhere like twelve to fifteen percent range.

Yeah, that that actually is is a good estimate for what that range is. Okay, and and should we assume then you're just going to be hoarding cash with the holding company until you get a sense that that those kind of defaults have have peaked out.

Mark what I would describe, you know, our our approach has historically been is making sure that we have positioned our cash throughout our legal page in a way to preserve maximum flexibility. So we're certainly going to be mindful of the the requirements for the operating company and will be responsive as we need to be there. But you know, we're going to make sure again we do have maximum flexibility golden company, but we are sensitive to that that P Myers cushion at the ALCO as well. So I could see how that plays out over time as far as um, you know how that may get rebalanced in the context of new information and what the second quarter starts to shape up and look up but but that's generally how we have managed our our resources just throughout the organization.

Hey Mark, this is Rick. I might just had the Franks, It's one as we release our 10-q last night. We did get provide great detail in the risk factors. Kind of our views of the capital situation. So you can you can we have a chance go back and and take a peek at those. But I think the other part I would say is that we get a we've intentionally wage told Capital hold CO2 from a capital planning point of view. And in to remain from a have a financial flexibility may be different than others. And so we we've always thought of you know, capitalism at the hold code being flexible and obviously through this type of environment. So how things develop we'll kind of, you know, Drive our actions as we go for so long before yeah, we we do look at Capital on a Consolidated basis and and and think through it I think through it, you know at that level continuously.

Okay. Got it in my next question maybe for Derrick. Are you able to discuss for us? You know when you're pricing is 11 to Mid teens return what you guys are assuming in terms of of.

Right in in should we expect that that would be you know lower than you would expect to see, you know on on your existing book.

Sorry cut out slightly there. Are we assuming what would be lower the the ultimate, you know default rate in claims right on new insurance that you'll be writing. You know today would be lower than what you expect to see, you know on your existing book.

Yeah, so the way to look at it when we're resetting price, so when we're writing the new business now, we're actually assuming in this scenario that you would have a bit higher default rate. So the way to think about it when we're setting pricing, we're doing it on a simulation basis, right? So we're looking at multiple scenarios, but as the economy and this is an unusual situation where we kind of have telegraphed in front of us a recession. So in that case when you kind of think about the let's say expected or mean path in our simulation that got relatively worse. So that's going to translate naturally in a two assumptions that you can have higher claim rates. And so you're adjusting pricing to essentially account for that in addition to having just higher claim rates. You're also assuming you're going to have just an increase in default rates, which also factors in an increase in the amount of capital. We have to hold against it. So you basically use those as inputs and then your output you basically kind of solve for an approach.

Price to get back to that return that you're looking for.

Okay, I just said that any color you can provide on kind of what you would assume today and kind of those default rates in in in claimers.

Yeah, I'm probably not going to go into a lot of details in the particular assumptions. They're also very Dynamic. I think the other thing to keep in mind we're still early on in this month. So we're still Gathering a lot of information particularly as we have the May payment dates coming up. So I would say we're constantly calibrating that and our pricing so I could do that regularly. So kind of give you my base case that's going to be I would say stay over very quickly and that's the best way to think about it. When we dynamically price we're constantly adjusting that and it's we're adjusting it. It's obviously there's more volatility around those adjustments in terms of our scenarios. Just give and kind of the nature of where we are because it's a bit unprecedented. It's not unique to the mail recession. So trying to figure out again we talked about this earlier. The unemployment rate are modeling takes an account is Big explanatory variables obviously home price paths unemployment, but even in

Perfect being kind of those unemployment paths where you know, it's much bigger percentage that are applying for unemployment on a temporary basis. So how quickly that snaps back going to be important variables and I would say we're constantly tweaking and updating our assumptions around that as well. And then how that actually affects home prices as well again from a fundamental perspective. We think home prices again coming into this fundamentally The Fairly valued the supply-demand Dynamics were very good. We didn't have a lot of speculative excess. So we think that, you know to the extent that they're kind of pressure on home prices. We don't see a significant kind of drop in our base case scenarios, but again at the margins were constantly adjusting that

Okay.

I think you know Mark I would add that their team have done an amazing job with radar rates of being able to take that those analytics real time into our pricing very very quickly wage. You know, if you go back a year or so two years ago. This industry would have labored over making pricing changes now, we can make them really very very quickly and reflect the risk environment all month, you know at the time it's occurring. So what they're referring to get supplied real time in the marketplace. So, okay great. Appreciate all the color.

And our next question comes from Jeff redone from Dolly and partners.

Thanks. Good morning. Good morning, Derek. I think you said earlier on maybe one way to think about this is kind of a combination of hurricane considerations and a run-of-the-mill long recession. So something like emojis S3. Did I catch that correctly?

Yeah, I think that is the right way to think about it and it's hard to I think bifurcate kind of those type of defaults. Right? So you kind of have to think about it in total but that's right. And the way we kind of situation playing out you at least the way I think of it is in the short-term. It's probably more of a disaster especially kind of in some of those early forbearances. Um, and then a typical disaster what happens is you have businesses turn off and they turn back on this might be more elongated compared to kind of a hurricane disaster. So we think that's probably that's a very big Force within it but again just because the fact that not all businesses are going to turn on and not all jobs are going to turn back on as you might see in a natural disaster you're going to have kind of that I would say more of a typical recessionary impact am well. The one thing though I would also keep in mind is the unprecedented government support because in a typical run-of-the-mill recession like an S3, you don't have things like like Spanish,

Unemployment benefits in terms of those who are eligible expanded unemployment benefits some checks being mailed out to people PPP loans. So trying to fax that in so even if you think about it as a run-of-the-mill recession, I think you also need to think about the government support which is going to end up putting downward pressure not to mention the fact that way you look at these loss mitigation workout options that the gses are putting in place, you know, I think the most likely scenario for borrowers who find themselves in real difficulty being able to make up payments that they've missed because of forbearance, but most likely scenarios if they can't make those those are put on at the end of the mortgage. So especially in a situation like this where it's recognized that off. It's really driven by kind of health issues and policy decisions. There's a real effort to keep people in their homes, which is important for us if we don't pay claims until birth

You know, it actually goes through the foreclosure process.

So that's why it's like it's like a combination of things that natural disaster run-of-the-mill recession but a run-of-the-mill recession that has a very significant government intervention that you probably under scales that you never seen em.

Okay. So what I wanted to get at is in the majority of the scenarios that radiant is running do Islands attached cuz they're typically just a couple of years ago. I think the wage normalized loss assumption and pricing was two two and a half percent cumulative. I would just call it on average Island attaching a 2 and 1/2. So given your thought process on this page as you running the majority of the cases. Are you are you even attaching on Islands expectation in most cases is we are not attaching on the islands. So, you know and I think you have some common scenarios out there and just to help since people use it as a frame of reference. For instance. If you're running a Moody's S3. You're not going to see an attachment a month is ask for we do see some of the islands attached and some not attached right and that's going to matter. Obviously the new islands cuz they're fortunate in issued one. That covers are $2,000 month.

Obtain the first three quarters in a scenario like that and S3 you would you could see that attached and potentially a scenario like that. But generally I would say know those aren't off. Those are providing tail coverage. And in this scenario, we're seeing kind of it outside of kind of most reasonable scenarios.

so on a life of book basis

well near term can be painful. If you're not attaching an island, you're not exceeding maybe 2 and 1/2 humor to it doesn't sound like you're targeted returns are likely all that discipline. Is that like a green?

Again, I would say that there's a tremendous there's a lot of uncertainty around it in terms of that economic path, but I do think the way to think about it is kind of making a distinction which you know, Frank talked a bit about wages kind of a short-term. I would say pay Myers Capital increase issue we have because as you have these delinquencies you have to stack increased Capital cuz p.m. Hours is quite liquid. So in that sense, but if you think about it over the long term and the probability that those go delinquent in a curing and again that natural disaster kind of scenario. I talked about you do see kind of this. I would say front-loaded increase in delinquencies. So you'd have an increase in P Myers capital and then you have incurred losses, but then that should be pretty much loaded and over the long term again. I think that depending on the scenarios, that's why I think we feel pretty comfortable from the ultimate claim perspective and how this plays out.

With a long-term, but again, I would just caution. There's obviously a lot of uncertainty around that because it's based upon.

The information we have at this point in time and it's going to be heavily dependent upon what happens not only from an economic perspective, but what's happening from a health perspective and how quickly States get back up online and how long they stay online.

Okay, thanks. And then just a quick follow-up. I think the sense was at the end of last year that the penetration rate on Reef eyes was higher than we had been seeing previously as you age the speed of somebody originating and then Reef I was getting shorter is your sense that the refi activity we're seeing in 2020 is still seeing those more elevated refi penetration levels off. Yeah, I think that's safe to say cuz I think it's the same Dynamic that we talked about before right as because again rates and as they continue to go lower you're seeing some of those books of business that page recent books of business that have a significant, you know, refi incentives. So for instance, when you look at our books, like the 2018 vintage if you look at that depending upon your you know assumption weather package seventy-five or a hundred basis points of kind of benefit you need, you know, the majority of that, you know has that incentive. So yeah, I think that phenomena that we talked about before continues and it'll Pig

And you especially as you see these new historical low interest rates.

Okay. Thank you.

And our next question comes from Chris, Tony from compass point.

Thanks for taking my call. I'm not sure if this is for Derek or Frank typically in normal downturn you delinquencies occur slowly and you know increase over time and at least historically Provisions have been very dependent on you know, the the age or the amount of payments that they've missed this cycle. It seems like we're going to get a whole lot of delinquencies very quickly. So I guess my question is the way you're thinking about it is if we assumed a hundred percent of of delinquency of forbearance is coming the second quarter. Are you trying to book the lifetime Reserve there or there's still some aging concept of delinquency in future.

Yeah, this is Frank. It's a great question. And that was part of what I was trying to address in in the prepared remarks, you know, the first part of that question about the timing of delinquency wage, you know, we're we're saying that it's likely to occur over the next couple of quarters and you know it it may take some time for for both borrowers to miss that second payment. So not sure on the timing of that and and the other factor in Derek touched on this as well, which is you know, the forbearance number themselves can be a little misleading potentially in that you can participate in a forbearance program but still be current on your payments. So, you know, that's something to keep in mind but at the time of that second missed payment, yes, we do need to make a an estimate of what the ultimate claim rate will be on those wage.

Default so, uh and and Derek spoke.

Got to that early in the presentation about um, you know, just the uh, as far as what that might look like and and given our experience with with with natural disasters et cetera. You know, we're we're not expecting a rate higher than our current default to claim right under defaults of seven and a half percent, but we'll have to check and see what available information we have at the point in time when we do make those estimates, which will likely see a fairly significant ramp-up in the second quarter under their computer anything else.

I think you covered it Frank. This is Rick. I might just had one other comment, which is I think I think you have to think about right now. We're we're at we're both very very early in the cycle. And it's Frank, that there are people that are continuing to make their payment while they're in for Barrett's we saw in April 1st. We'll see what may may first and one June first month. So the timing of all this is still early and but the you know, the interesting part is Frank covered the Gap accounting is as they present themselves we reserve right and it's a Thursday. We don't we don't have have material I be in ours. So we really those defaults have to present themselves and and kind of qualify for our reserves from a gap accounting point of view. So I'm not timing of this is still early to project we would expect to see a dramatic increase in the second quarter just from the numbers obviously, but how that. Extends and how it plays out, you know Stone no,

The guys all the metrics of the numbers sure. I'm not I'm not asking you for your expectation of even what DTC is or how many forbearance is just talking about the accounting. So my point is once alone becomes delinquent forbearance. Would there be an additional Reserve as those delinquencies age meaning once you're in forbearance and I missed two payments, you know, they have up to six months and then they automatically extension up to 12 months as those get older would you assume that?

The ultimate default to claim right on those specific colognes changes or because they're in a forbearance program stays the same as they get older until they you know until you see whether they cure or not sure. So I took a couple of technical refinements on what you said whether or not they're in a forbearance program doesn't impact the missed payment in the requirement under gaap to establish an estimate of of ultimate loss. So but participating in a forbearance program and it having this two payments will impact our expectation of what the ultimate loss will be. And so that is the factor that they comes into play now the longer it stays delinquent. We're going to evaluate, you know, are they still suck educating in a Polar Bears play on board of the facts and circumstances around those delinquencies. What's the profile? What's the overall economic landscape Etc. So it it gets updated in each subject.

. And and we'll make those adjustments in each. Based on the information.

At that time, but I think maybe what you're you're looking for, you know unlike T Myers which has a a very prescriptive after office is it's for payment it now steps up to something else. Our reserving is not as prescriptive and it is based upon all available facts and circumstances wage time. And so we may adjust up or adjust down what we expect the ultimate loss maybe but but that happens in Palm Beach. I hope that's helpful Frank Frank. I'm just going to add just to be clear. I think in answer to the way to think about it as the loans progress. We would kind of assign a higher default to claim rate for those that remained in default. Cuz the way to think about it use that kind of initial percentage and then a portion of them wage.

Sure, the remaining ones and you increase your default to claim rate as they age through time. That's the way to think of it. That's the story if we if we got it right up and that all works its way through as as these things and he tried it. We wouldn't necessarily have a plus or minus to reserve obviously. There's a number that degree of perfection, but we may start with an estimate and then we continue to refine it as we see what cures them what continues

Sure. Yeah, let me questions just because this is so unique of there's an incentive or there's no call on someone to cure until 6 months. So whether they're three or four payments the liquid it's if they can defer on the end you just a different economic incentive for a person then there typically is the situation is why I'm so passionate now, they kind of work that's a very interesting point and we're watching we're watching the behavioral aspects of this very very closely because like we said people are going in for marriage plans and still making payments that you got to watch the industry statistics cuz they they're a little bit confusing but as we get through May will have a much better feel but I think you know, the the social aspect of this in how people because ultimately there's no this is not a payment forgiveness. This is a payment deferral and how it comes back around and you guys have read all the same articles does have to be paid back at the end of forbearance going to be the first of all the different waterfall workout options, which are still birth.

Are well-defined today, but I think still evolving as to where they might be the behavior of people that want. Don't want to get behind or have forbearance, you know kind of as part of the future. I think you're going to see some of that separate. But again, we don't know it's so early and how how people take advantage of this program over a month or two six months 12 months still to be. All right. Well, thank you so much and thank you for dealing with my annoying mortgage account of questions. I appreciate it. Very good questions. Thank you.

and we will take

our final question from sales Stefano from Deutsche Bank

Yeah, thank you guys are extending the call for so long. I hopefully just a couple of far less nuanced questions than performing in your prepared remarks you talking about the long post that the sales quite in in in the real estate side the expectation to grow certain businesses such as title, is that organic growth inorganic growth of a mixture of both, you know, strategically over the long run understanding the short run as much much less clear. How should we think about what growth mean growth we think of it as organic birth. Just just you know, we feel like we've you know, you think about the title business which many of you all know very well, you know, it's an old Legacy business driven by you know agency relationships were very very focused on leveraging data and analytics and Technology to drive our title business and leverage our Mi relationships and our other Market relationships to grow so birth.

Brian and Eric in our in our sales team and operations team have been very focused on onboarding new clients, right? So we're growing that business through the addition of new clients and the expansion of existing relationships. And we've we have our sales force are are kind of our entire sales force focused on, you know, uh at an enterprise-level looking at Thursday, we deepen relationships and expand relationships with our clients title evaluation are Naturals right now, you know, we may see our Oreo kind of asset management business come back in The Cycle s so far where we have a dominant market share in that business from a diligence perspective. You know, we're we I think we have a strong foothold and we see broader opportunities across the technology and real estate services. So where we sit today, it's organic and we are we are headed down focused on our customers and the feedback. I personally get and I I share this off as feedback iPod.

So I get Derek gets Frank guess we all get from our customers as they view US differently than just an MI. Does it make a difference on the Mi decision in some cases? Yes some cases it's commercial, but from a relationship point of view. It can make either the Mi relationship combined with being on the serve them in a broader way. I think provides us an opportunity to grow our business has organically

Got it. Okay. Thank you Gerald in response to an earlier question. I got the impression, please correct me if I misheard you but it felt like 9% of the the business was outside of the potential haircut for the for FEMA disaster area. What exactly is that 9% if I understood correctly. What are you in my mind for variances kind of widespread in every state the FEMA disaster area. So what falls out? Yeah, so what I was distinguishing, um, so a hundred percent actually in those areas are given the haircut day one. So when I was getting into is um, as you progress through time, so the distinction being is once your kind of Beyond this page 120 days under P Myers after the initial the date the way it's drafted in order to continue to get that haircut. You have to be subject to a forbearance plan off.

and you have to be in a state or it

Area that's eligible for individual assistance and right now right so that's all I meant. And that's that's kind of when we talked about that his Amendment. That's one of the kind of those open, I would say I didn't really contemplate this. It really should be a hundred percent of all those kind of forbearance alone. So more about kind of a technicality I think in the P Myers that we're trying to address.

No, perfect. That makes sense. Thanks. Thanks for the clarification there and hope you guys continue to be well, thank you.

And I will turn it over to see Thornbury for final remarks. Thank you. I want to thank everyone for participating in our lifetime ever virtual call Derrick Frank and John and I are all sitting in very different places in this country right now and our team pulled off. I think a a very successful kind of environment. I want to I want to wish you all and your families. I hope everyone's staying healthy and stays well given these challenging times and I want to compliment our employees on just a phenomenal job as I mentioned earlier. We asked everybody to leave their offices very quickly and go work from home. Everything was ready. They've done an amazing job our customers. Uh-huh. Our customers have posted it often about it. So I think you know with that, uh, you know, we look forward to continuing to have discussions as this environment plays out and look forward to talking to you all soon. Thank you for birth.

Joining a call today and stay well, thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating you may now disconnect.

Dead dead dead dead.