Q2 2021 NMI Holdings Inc Earnings Call
Good day, and thank you for standing by and welcome to the anti My Holdings incorporated second quarter 2021earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question.
During this session you will need to press star 1 on your telephone if you require any further assistance press Star Zero Oh, No lights on the conference over to your Speaker today, Mr. John Swenson. Please go ahead.
Thank you good afternoon, and welcome to the 2021 second quarter conference call for National M. I.
I'm, John Swenson, Vice President of Investor Relations on Treasury joining.
Joining us on the call today are Brad Shuster executive Chairman.
Merkle CEO, Adam Pullets are our chief financial Officer, and Julie Norberg our controller.
Financial results for the quarter were released after the close today. The press release may be accessed on <unk> website located at National I'm on Dot com under the investors tab.
During the course of this call we may make comments about our expectations for the future.
Actual.
Results could differ materially from those contained in these forward looking statements.
Additional information about the factors that could cause actual results were trends to differ materially from those discussed on the call can be found on our website or through our regulatory filings with the SEC.
Yeah from to the extent the company makes forward looking statements, we do not undertake any obligation to update those statements in the future in light of subsequent developments.
Further no 1 should rely on the fact that the guidance of such statements is current at any time other than on the time on this call.
Also note that on this call we refer to certain non-GAAP measures.
On today's press release and on our website. We've provided a reconciliation of these measures to the most comparable measures under GAAP.
Now I will turn the call over to Brett.
Thank you John and good afternoon, everyone.
I'm pleased to report that in the second quarter.
National M I delivered strong operating performance.
Significant growth in our insured portfolio and record financial results.
As we talk today I remain highly encouraged.
The economic stress of the Covid pandemic continues to recede.
And the housing market continues to lead with resiliency and foundational strength.
Against this backdrop.
We achieved record adjusted net income of $58.1 million or 67 cents per diluted share.
And GAAP net income of $57.5 million or <unk> 65 cents per diluted share.
Adjusted return on equity for the quarter was 16.4% and GAAP ROE was 16, 2%.
We ended the second quarter with a record $136.6 billion of high quality primary insurance in force.
We are helping more borrowers than ever before gain access to housing.
And the growth in our insured portfolio reflects this strength.
Up 10% compared to the first quarter of this year and 38% compared to the second quarter of 2020.
Credit performance in our in force portfolio also continues to trend in a favorable direction.
And we are increasingly optimistic as we look forward given the quality of our underlying book sustained resiliency of the housing market.
And strength in its strengthening macro environment.
Shifting to Washington matters.
We would like to congratulate standard Thompson on her appointment as acting director of the FHFA.
Director Thompson is a highly experienced regulator with deep knowledge and expertise.
We expect she will further the baidu administration's efforts to expand access and equitable opportunities for homeownership to all communities.
Maintaining an overarching focus on preserving the safety and soundness of the housing finance system.
We believe there is broad recognition in Washington of the value that national MRI and the broader private mortgage insurance industry bring to these efforts.
Providing borrowers with down payments port and equal access to mortgage credit.
We're also placing private capital in front of the taxpayer to absorb risk and loss in a downturn.
And we look forward to engaging with director Thompson and the broader FHFA leadership team in the months ahead.
We also note and applaud the continued effort by those in Washington to assist borrowers who are still impacted by the Covid crisis.
The recent housing stability action plan outlined by the White House.
Foreclosure process changes adopted by the CFPB and the FHFA.
An enhanced set of loan modification and payment reduction options introduced by HUD the.
The USDA and VA are important additional steps in this regard.
The recovery from the pandemic, while broad based we will not be even.
And as the immediacy of the crisis receipts, there will still be many in need of support.
We believe.
Policymakers and regulators are committed to providing additional assistance to help as many borrowers as possible remain in their homes and resume their lives with limited interruption once the pandemic has passed.
Overall, we had a terrific quarter and are well positioned to continue helping borrowers and delivering on the goals that we set for our business.
With that let me turn it over to Claudia.
Thank you Brad.
Cayman business continued to outperform on the second quarter.
We delivered significant new business production strong growth on our high quality insured portfolio and record financial results.
We also enjoyed continued momentum in growth in our customer franchise.
Operating 33, new lenders the most we've added in a single quarter since 2018.
We are now doing business with a broadly diverse group of more than 1200 high quality originators, including 185 of the top 200 lenders nationwide.
During the second quarter, we generated $22.8 billion with Ni W.
Up 73% compared to the second quarter of 2020.
Our volume included a record $18.9 billion of purchase on IW up 6% from the first quarter and up 143% compared to the second quarter of 2020.
The purchase market remains strong with the key themes that have driven housing.
Demand through the pandemic carrying forward and.
And rising house prices and the recent movement in rates contributing to incremental origination volume and activity.
First time homebuyer demand is at a high and private mortgage insurance penetration of the purchase market is increasing as a growing numbers of borrowers turn to our industry for down payment support.
On our first quarter earnings call.
No that that then rising rates and the increasing equity position of many eligible homeowners who are having on early impact on refinancing application volume a precursor to ni debut.
This trend is reflected in our refinancing production, which slowed notably from a record $8.5 billion in the first quarter to $3.8 billion in the second quarter.
The decline in quarterly refinancing volume was balanced by an increase in the persistency of our in force portfolio.
Our 12 month persistency ratio stabilize and trended up sequentially from the first time since the first quarter of 2019.
Overall, the private mortgage insurance market is pacing towards another terrific year.
We estimate the industry volume will reach $550 billion to $600 billion in 2021, and we continue to see a rational and constructive pricing environment with strong unit economics and attractive returns on our new business production.
Pricing has evolved which is natural as risk and anticipated loss comp had stabilized through the pandemic.
We believe however that the industry is at a point of balance fully and fairly supportive lenders and their bars against the backdrop of a resilient housing market and broadly improving macro environment, while at the same time appropriately protecting returns and our ability to deliver long term value.
For shareholders.
Looking forward our outlook is positive.
Industry volume is exceptionally strong with long term demographic trends supporting robust purchase demand and the experience of the pandemic reinforcing the value of homeownership.
Credit performance is trending in a favorable direction.
With underwriting discipline remaining paramount across the mortgage market.
Third house price appreciation, providing a sizable equity buffer and an expanded and broadly applied government toolkit now available to assist borrowers 2 times of stress.
Against this backdrop, we are executing on our plans and believe we are well positioned to drive growth consistently compound book value and deliver for shareholders going forward.
Before turning it over to Adam I wanted to know how proud I am debt for the sixth consecutive year National mine has been recognized as a great place to work.
Great place to work is a global authority on workplace culture employee experience and leadership and partners with Fortune magazine to produce the annual fortunate on 100 best companies to work for list.
We believe that the quality of our team and the culture that we have established our key competitive advantages and it is gratifying to again be recognized for the strength.
With that I'll turn it over to Adam.
Thank you Claudia.
We delivered record financial results from the second quarter with significant growth in our insured portfolio and continued strength in our credit performance driving record revenue and bottom line profitability.
Net premiums earned were a record $110.9 million adjusted net income was a record $58.1 million or <unk> 67 per diluted share.
And adjusted return on equity was 16, 4%.
Primary insurance in force grew to $136.6 billion up 10% from the end of the first quarter and up 38% compared to the second quarter of 2020.
12 month persistency in our primary portfolio was 54% up from 52% in the first quarter.
This is the first time, our persistency has trended up sequentially since the first quarter of 2019.
We expect persistency will continue to improve through the remainder of the year notwithstanding the recent movement in rates as the record and IW volume that we've written at exceptionally low interest rates since the beginning of the pandemic fully comes into the persistency calculation.
Net premiums earned in the second quarter were $110.9 million up 5% compared to $105.9 million in the first quarter.
We earned $7 million from the cancellation of single premium policies compared to $9.9 million in the first quarter.
Reported yield for the quarter was 34 basis points compared to 36 basis points in the first quarter, primarily reflecting the decreased contribution from cancellation earnings during the period and the introduction of ceded premium costs associated with our sixth island offering in April.
Investment income was $9.4 million in the second quarter compared to $8.8 million in the first quarter.
Underwriting and operating expenses were $34.7 million compared to $34.1 million in the first quarter.
Expenses in the second quarter included $1.6 million of cost incurred in connection with our most recent Ireland offering.
Excluding Ireland related costs, adjusted underwriting and operating expenses were $33.1 million in the second quarter compared to $33.7 million in the first quarter.
Our adjusted expense ratio was 29, 9% compared to 31, 8% last quarter.
This is the first period, our adjusted expense ratio has been below 30% and important milestone that serves to highlight the significant operating leverage embedded in our financial model and the success, we've achieved in efficiently managing our cost base as we have scaled our insured portfolio.
We had 8764 defaults in our primary portfolio at June 30, compared to 11090 at March 31.
At quarter end, approximately 90% of the loans on our default population or enrolled in a COVID-19 related forbearance program.
Yeah.
Our credit performance continues to trend in a notably favorable direction with an increasing number of impacted borrowers curing their delinquencies and fewer new defaults emerging as the economic strength of the Covid crisis receipts.
Our default rate declined to 1.9% at June 30, less than half its peak from last summer.
On the improvement continued in July with our default population declining to 8277 at July 31.
And our default rate falling to 1.7%.
Of note the number of loans in our portfolio that have missed at least 1 payment, but not progressed into default status an important leading indicator of our near term credit performance is at its lowest level since the beginning of the pandemic.
Claims expense was $4.6 million in the second quarter compared to $5 million in the first quarter.
And our loss ratio defined as claims expense divided by net premiums earned was 4.2% compared to 4.7% in the prior period.
We reevaluate the assumptions underpinning our reserve analysis every quarter.
And as we progress through the remainder of the year, we'll consider among other factors the performance of our existing borrowers the availability of additional support for those still a need at the end of their forbearance period.
The underlying resiliency of the housing market and path of house price appreciation in the overall macroeconomic outlook to determine whether further changes to our claims reserves are necessary.
Interest expense in the quarter was $7.9 million and we recorded a $658000 gain from the change in the fair value of our warrant liability during the period.
GAAP net income for the quarter was $57.5 million or <unk> 65 per diluted share.
Adjusted net income, which excludes periodic transaction costs on fair value changes and net realized investment gains and losses.
It was a record $58.1 million or <unk> 67 per diluted share.
Total cash and investments were $2.1 billion at quarter end, including $81 million of cash and investments at the holding company.
Shareholders' equity at the end of the second quarter was $1.5 billion equal to $17.3 per share up 6% compared to the first quarter and 15% compared to the second quarter of last year.
We have $400 million of outstanding senior notes and our $110 million revolving credit facility remains undrawn and fully available.
At quarter end, we reported total available assets under P mirrors of $1.9 billion and risk based required assets of $1.2 billion.
Excess available assets were $716 million.
In summary, we achieved record results in insurance in force net premiums earned total revenue expense ratio and adjusted net income or.
Our credit performance continues to stand out in a dramatic way and as we look forward. We believe that we are well positioned to continue delivering strong mid teen returns that are significantly in excess of our cost of capital.
We expect that the growing size and attractive credit profile of our insured portfolio along with our broadly disciplined approach to managing risk expenses and capital. We will continue to drive our performance with that let me turn it back to Claudia.
Thanks.
Okay.
Okay.
Thank you.
Yes.
Operating growth portfolio.
Portfolio and encouraging credit trends driving record financial results.
Our performance in the period built upon the strength and resiliency, we've demonstrated through the duration of the pandemic and we believe we are well positioned to continue to win with customers drive.
<unk> growth in our high quality insured portfolio maintain the right risk return balance and deliver strong results for our shareholders.
You for joining us today I'll now ask the operator come back on so we can take your questions.
Alright, so as a reminder to ask a question you will need to press star 1 on your telephone to resolve your question press the pound key.
That is star 1 on your telephone please standby, while we compile the Q&A roster.
Okay.
We do have a question from Doug Harter from Credit Suisse. You are in our lives.
Thanks, Adam.
As you think about the premium yield for for the rest of <unk>.
For the next couple of quarters.
I guess, how do you think about single premium cancellation now that persistency has started to improve.
And just thinking about the the underlying enforce premium yield what are the expectations around that.
Yes.
Terms of cancellations, we expect the dollar contribution of cancellations may decline through the remainder of the year somewhat modestly quarter to quarter and that's largely because the policies.
Net are primed for refinancing from prior to Covid a lot of the unknown.
Unearned premium revenue on those policies has already been recognized through with cancellations that have come through thus far in terms of the impact of that in broader movements in yield and a steer through the remainder of the year.
Don't provide anything explicit but I'll note that we expect to pursue another IL on offering in Q4, which will bring with it additional costs towards the end of the year and as we've talked about we will likely see what I'll call continued fluctuation, but more likely some modest down pressure on the contribution from cancellation earnings over the next few quarters and from a yield.
Standpoint, the dollar impact of cancellations will then be paired against what we expect to be continued growth in our insurance in force and so from a yield standpoint. It may have a little more of an impact than what we see as a as the decline.
As a dollar contribution.
Okay.
That makes sense.
And then can you just talk about.
Just kind of what you saw competitively this quarter that.
And it looks like your market share kind of swung around a fair amount for the last few quarters, yeah on net positive but.
Yes, just just the dynamics that lead to those types of swings and you know them.
Market share.
Sure.
Focused on market share, it's just not something we manage towards our focus is serving our lenders and their bars deploying our capital responsibly and driving profitable growth in our insurance in force. That's the key for us and we're doing exactly what we set out to do we're stacking high quality new production.
Driving if growth, which drives revenue and maintaining discipline around risk and expenses.
Keep just that in Q2, 10% growth in if compared to the first quarter and 38% year over year.
Look and IW in market share in this case, it will fluctuate from quarter to quarter.
I will comment that over time, we expect the industry will settle into a roughly pro rata distributions plus or minus a few points and those points are driven by risk appetite decisions around transactional volume and other value drivers.
Great. Thank you.
Sure.
Next 1 on NICU is Bose George from K B W fewer non alive.
Hey, everyone. Good afternoon. Thank you just wanted to follow up just under the industry competition question from Doug.
Terms of I know you guys targeting a a risk adjusted return, but do you think lenders are getting more focused on price.
Over time or do you think that is kind of remained pretty stable as well in terms of how you know how they do their business.
Yeah.
It's a great question I think that debt.
Lenders have always.
Looked at price.
Is it as a key decision maker, but.
There are several ever factors of of what Theyre doing to Inc to choose their on my companies.
Okay.
The the idea the surface is important relationships for us the 2 important factors with relationship from with lenders are we need to obtain a lot of knowledge for each of these lenders and navigate through this digital world and most importantly to continue activating new lenders, but I really believe that it is mentioned on.
My scripted remarks, we continue to see a rational constructive pricing environment.
You know pricing has evolved which is natural and to be expected as risk and estimated losses of stabilize through the pandemic.
We've seen as a natural evolution of things given the improving macro environment, where changes appear to have been made.
In connection with real underlying risk improvement as opposed to competitive pressures.
So we're optimistic that we will not we will see this balance kind of carryforward, because we certainly believe it should.
Okay, Great. That's helpful. Thanks, and then Okay and then just on the expenses.
Just curious how we should think about the expense ratio over time.
Clearly the growth underlying growth of your insurance in force remained strong.
So you kind of wait to for us to think about where that expense ratio could go over time.
Yes Bose.
Speaking our goal is obviously to be as efficient as we possibly can but we still expect debt to invest fully on our people our systems risk management strategies, our growth all things that have driven value for us thus far and we expect to continue to be core drivers going forward.
We already have I'd note the smallest absolute expense footprint in the industry by a fairly wide margin solid head count and initiatives like the 1 that we announced earlier with Tcs really help us find even greater savings.
From an expense ratio standpoint going forward, we expect over the long term debt will migrate to the low to mid twenties overtime I would caution that that won't happen overnight.
Obviously the rate of improvement that we deliver in the ratio itself will be a function of both the expense discipline that comes through as well as the growth in the insured portfolio and premium revenue, but things are moving in the right direction and we're encouraged by that.
Okay, Great that's helpful. Thanks.
Yes.
Next 1 on acute is Rick Shane from JP Morgan fewer non alive.
Hey, everybody and thanks for taking my questions.
Look Bose and Doug touched upon.
Really the first part of my question, but when we think about the factors in the industry.
There's intense competition among the originators we are in the midst of an extended and pretty significant period of home price appreciation and Theres also an ongoing shift you guys pointed out towards purchase.
Activity.
I am curious when you think about those 3 factors how you calibrate.
For credit and your credit underwriting decisions, because I think in some ways, you've got a lot of different moving parts there.
Okay.
Yes, Rick it's a good question, what I would say the name of it will tick through them is that first.
Notwithstanding what you've you've identified as competition on the lender side, we haven't seen a broad deterioration in underwriting standards remember that market that we serve as the GSE market nearly 98% plus of the loans that we ensure are sold or guaranteed by the <unk> and so it's really how the GSE as defined in our credit box and how lenders than debt.
Fine a box that's either as expansive or more restricted on what the Gse's put out we just haven't seen.
On a deterioration of of underwriting.
Standards, either on the lender side or from the GSE and that's really encouraging at this point is 1 you touched on on the HPA environment in some of the Decisioning that we're making there as well.
Broadly speaking we see.
On real strength on a sustained basis to the HPA environment than the general housing environment.
The market, it's a market like all others driven by supply demand dynamics and what we see today is real and sustainable demand, that's driven by record low rates strong buyers and largest generation in American history is aging into the point, where theyre looking for starter homes and the experience of the pandemic has really fueled.
And emotional on practical pull towards homeownership and Thats contrasted against.
A severe supply side shortage in the U S. We've been significantly under built an underdeveloped for an extended period of time.
And that can't be solved overnight. So overall as we see the opportunity in the market.
See continued credit strength and rigor around underwriting guidelines were encouraged by the direction on the housing market overall, the need for support from the semi industry and sustainability of perhaps not 15% per annum HPA, but general uptrend in HPA.
And.
That's a terrific position for us to be in on the M&A side.
Great Adam. Thank you for all of that and then the last part of that question and I realize it was there were many parts.
Is there anything in your underwriting or on your experience debt on an apples to apples basis leads you to think credit is different between purchase and refi is there any sort of.
Psychological advantage to having a borrower even if the terms are the same.
It had been in the home for a longer period of time is there anything we should think about there as well.
It's interesting we've looked at it extensively and what tends to emerge from the data is that.
There is a little bit of outperformance on the purchase side as opposed to the refi side, it's difficult for us to isolate why that's the case because.
All else equal similar headline or even layered risk characteristics.
Characteristics, we tend to see in the aggregate slightly better performance on the purchase side on the refi side, perhaps there is something around the affirmative.
Statements that a borrower is making at the time on purchase around their expectations for their future employment profile on the confidence that they have in their financial position. It's a significant obviously investment, they're making and obligation they're taking on and we find that most borrowers only take that on when they're at a high point from a confidence level once you're already in.
Into the loan it may not be the same affirmative statement. When you are pursuing a refinancing that's just.
Some some ideas that we have kicking around difficult to isolate why but we do see on the margin not enough to drive I'll call them significantly differentiated outcomes from a price return standpoint, but on.
On the margin better performance from the purchased borrower.
Great Hey, that's a really interesting anti appreciate the thoughtfulness. Thank you guys.
Next 1 on acuity, calling Johnson from B Riley Your Securities you are now live.
Hey, good afternoon, thanks for taking my questions.
So it looked like in the quarter, the pmiers cushion kind of in excess of requirements expanded a little bit in percentage terms.
Would it be fair to interpret that maybe is an effort to kind of preempt. This dynamic of delinquent loans that continue to age low carry with them a little bit higher capital requirements.
Also maybe seeing a little bit of a smaller capital benefit from that FEMA haircut is a smaller percentage of loans in the future are going to be in forbearance plans.
No. It's a good question, but the.
The expansion of the PMA risk cushion really just reflects the execution of our 6 Thailand on April and so are our March 31 numbers because the transaction was completed after quarter end didn't reflect that transaction. When we do those deals obviously, we take a lot of risk off the balance sheet and taking that risk off the balance sheet, we get relief.
For the associated <unk> required assets and that causes an expansion of our cushion on our sufficiency ratio.
We expect to be to continue deploying that excess position in support of new business. The nice thing for us in terms of.
On the how our capital position develops.
Going forward, depending on performance of the portfolio of new loans coming in are being subjected to to.
2 the P. Myers haircut. If you will is that at this point nearly the entirety of our insured portfolio sits under our comprehensive reinsurance program.
On both our quota share coverage and our islands and so to the extent, we see the required asset charge on our in force portfolio grow because future delinquencies don't necessarily get the same benefit of the haircut if they don't develop because of the COVID-19 hardship the strain the incremental strain of those defaults will just naturally be absorbed.
In an accordion like way by the existing reinsurance structures.
Got it that's helpful. Thank you and then.
Kind of looking at with the FHFA kind of eliminating the adverse market refinance fee a few weeks ago.
Would it be reasonable to expect maybe a boost in refinance volume here and kind of see that associated impact on persistency going forward.
Yeah, It's a good question.
I think the FHFA adverse market refinancing surcharge or fee that was put in place last December we never really saw that actually be a.
Pass through to to borrowers in most instances and most lenders that we talked through.
Absorbed the cost and those that did pass it along at most pass along as roughly a 1.8 of a point increase in the note rate and so the elimination of that fee. We don't necessarily think that thats going to drive an expansion of the refinancing opportunity. Obviously the movement in rates that we've seen itself may have a more pronounced impact.
From a persistency standpoint.
Our portfolio, we talked about it last quarter, it's really split pretty meaningfully the weighted average note rate underpinning our pre COVID-19 population. So all the business that we wrote from our inception through March 31 of last year. If we use March 31 April 1 of 2020 is a line of demarcation have a $4.1 6.
On underlying weighted average note rate and our post Covid or April 1.2020 through June 30 of this year production has a 3% weighted average underlying note rate and so the movement in rates, it's been reasonably significant as a headline matter right, 20% to 25 basis points and a 30 year fixed rate national average.
But going from a $3.20 down 2 or 3 doesn't fundamentally change the refinancing opportunity for that pre COVID-19 population and so we don't necessarily expect that the movement in rates itself will will spur a significant incremental amount of turnover in the pre COVID-19 population and obviously.
Our post Covid population with a 3% underlying weighted average note rate is still largely insulated from.
What we would from.
Refinancing activity, given where rates are today. So it's possible, we probably will see some marginal increase in refinancing activity and it may have a degree of impact on persistency, but just given how the the note rate stack for the portfolio.
We don't expect something dramatic.
Right. Okay that makes sense those are all my questions. Thanks.
Next 1 on acuity is Marquis from Jewish you are now live.
Yes. Thank you good afternoon.
Looking at your underwriting.
<unk>.
Average FICO scores come down just fractionally, the LTV is up a bit.
Do you think you will make more progress on that direction kind of opening up the credit box was that still.
Going through to Q2.
<unk> will see a little bit more there.
Yes.
No Mark it's a good question.
Okay.
We've prided ourselves historically on being the most conservative emigh provider in terms of the risk that we led into our portfolio.
That was certainly the case.
Immediately after the onset of the pandemic, we took specific actions to really further curtailed a flow of lower quality business into our book.
We're now 16 months into the pandemic and those initial concerns while we think certainly appropriate at the time no longer hold we haven't fundamentally shifted our risk appetite.
We've done over the last few quarters I would say is it's simply ease some of those significant restrictions that we instituted early on.
As to where we go in the third quarter.
There'll always be a.
I'll call it movement small movements from period to period, just depending on which lenders, we're getting our flow from and some other small dynamics, but I don't expect that there'll be a significant continued movement in the mix of our business in future quarters.
And then a question of if we do continue to get the strong home price appreciation.
What's the experience to do homeowners.
Often or ever take affirmative steps to try to cancel their mortgage insurance.
Their home price of value on.
Prices.
They have gone up meaningfully since they bolt on.
Your experience on that.
Yeah.
So obviously our policies are canceled level automatically when the loan itself is amortizing down below a 78% LTV.
And it's also cancel if the borrower and not all policy, but.
Monthly policies are tangible if the borrower secures an appraisal that shows that on on a price basis. There. They are at or below an LTV. We've just not had a lot of experience to show that that's a path that borrowers go down as you noted it's an affirmative steps the borrower has to be 1 focused on I'll call. It their loan itself focused on the.
<unk> policy and the premium payment within that loan and then make the decision to go and spend the dollars on an appraisal outside of a refinancing or outside of some other need.
With an uncertain outcome because they are spending the dollars, it's a fixed cost and unless they appraise at the necessary level. They don't then get relief from.
From their monthly premiums. So we just don't see we don't see that activity and to give you. Some context, obviously I talked about the underlying weighted average note rate on our portfolio from the pre COVID-19 period being 416% nearly every 1 of those borrowers should be refinancing today, because they have an opportunity for significant savings.
On a monthly basis, and we see enormous inefficiency in that arena right, which is much more top of mind and in focus for borrowers to begin with so we don't see.
We ended up seeing perhaps not inefficiency, but.
On a similar lack of attention on the idea of securing an appraisal.
Specifically for the purpose of canceling them on.
That's helpful. Thank you.
Next 1 on a Q is Michael Calvi from Morgan Stanley you are now live.
Hi, everyone first of all big congratulations on yet another successful quarter. My question for you today is about your the reliance on your future results on ongoing governmental support.
Obviously forbearance programs without a significant impact on performance thus far throughout the pandemic. So I was hoping you could add some additional color on how you are thinking about this all going forward and specifically manage risks involved in the transition away from the current 8 heavy environment. Thank you.
This is Brett let me, let me address that.
So with respect to the GSC forbearance programs, we do really do applaud the efforts of the FHFA the Geo season, and many others in Washington for how they have so quickly and consistently effectively supported homeowners through the Covid crisis.
The forbearance programs have been enormously valuable helping borrowers bridge from a point of acute stress to a much more stable position today.
And the expanded set of modification and payment deferral options introduced early in the pandemic.
Have helped borrowers successfully transitioned out of forbearance and default status.
But as the programs wind down there will undoubtedly be some who are still struggling.
Forbearance will work for most but not necessarily for all.
This group, we expect there'll be another policy response.
Because it doesn't make sense to leave these borrowers into forbearance on a perpetual basis.
But it also isn't fair and does it make sense to cut them loose without support at the end of the.
Port closure process.
So.
We think.
Engineering, a soft landing.
Preventing foreclosures, allowing borrowers to harvest the significant after the equity that is recently built in their homes.
Spite the missed payments under forbearance and helping them find new housing that is more sustainable in light of their new position will be critical and we believe policymakers will follow that path.
And just to layer on to that.
On Saturday, our broad view is that there will be additional support that's offered.
It certainly aligns with all of the conversations that have happened thus far in DC, even what we're seeing over the last few days and focus around the eviction moratorium, which is rental focus but it shows the eagerness to provide additional support for reserving purposes, though importantly, we've chosen to anchor more to downside scenarios for reserve setting.
And we've not accounted for the prospect of additional assistance beyond the current forbearance programs and the assistance of day entail as we set our reserves and so we are broadly optimistic in what we think will be done and what should be done, but as a financial matter, we have not baked that in.
2 reserving or to other decisions that we're making around new business production.
Perfect I appreciate the great responses. Thank you.
Q.
Next 1 on acute is Ryan Gilbert from BT I E. You are now live.
Alright, thanks, everyone.
First question from me.
Just noting the nice improvement that we've seen in persistency and insurance in force on a sequential basis.
Im wondering how youre thinking about balancing between maybe it's on our balance, but just how youre, how youre thinking about <unk> growth.
Versus premium rate in the second half of the year on.
Given that you're expecting persistency to continue to improve in the third and fourth quarter.
Yes.
Brian Let me first comment around the premium rate, we don't provide specifics about our premium return on their W. But what I can share that we're generally seeing rates that are in line with pre COVID-19 levels with similar similarly strong risk adjusted return opportunities broadly available on the market.
And as far as I think you were also was the other part of the question Ryan around it.
22 market I missed the second part of your question.
Right.
Question was was really just the extent that you're balancing on IW growth in premium rate and if you have any comments on 2022 I'm all yours.
Yeah.
We really private EMI.
Is it tracking towards just another terrific year in 2021.
It's still somewhat early but looking out into 2022, we expect continued strength in the purchase market.
Mainly fueled by growth in the total purchase origination volume and increased semi penetration as more and more first time home buyers come into the market and you know our support. However, we also expect refinancing volume will continue to slow with a decrease in total refi origination activity.
And then that's a further decline in that my penetration of the refined market taken together, we expect that next year 2022 market will be large by historical standards, but not necessarily approached the records that we've seen over the last 2 years.
Okay got it that's very helpful. Thank you.
And I guess just thinking about.
<unk>.
And <unk> in the second half of the year and Adam your comment around the potential fourth quarter, Ireland is it correct to think that.
The pmiers excess debt that you currently carry at the end of June should be mostly deployed by <unk>.
I'm going to hold that 1 in reserve just as obviously it signals a forecast of <unk> and we're guarded against that.
Claudia mentioned in our prepared remarks on some of the follow up here that we do see a tremendous opportunity still in the semi market broadly and obviously, we're doing more with customers. We are having success on it.
A terrific opportunity to continue to put on high value business at attractive risk adjusted returns and that will be our goal. We've got plenty of capital obviously between the excess position all the capital at the Holdco. The untapped revolver, all the capital we need to prosecute the opportunity as a risk management matter, we will be pursuing the I O N E.
Most likely depending on market conditions, but most likely in.
In the fourth quarter and feel good about where that market is that at this point.
But as to deploy.
Deployment of the current excess position in the rate of deployment.
On the decisions, we make on the island market are equally driven by risk management as well as capital and so we'll likely still have an excess position. When we are pursuing while we will certainly have an excess position. When we're pursuing the next I'll add on it'll just be the time for us as a programmatic issuer to be back in the market.
Okay got it that's very helpful. Thank you.
Thanks, Brian.
Alright, again, if you would like to ask a question. Please press star 1.
Just 1 on acute is Geoffrey Dunn from Dowling you were in our lives.
Thank you and good evening.
I've got a few questions first Adam can you share the claim rate assumption on new notices this quarter comp.
Compares to 9% last quarter and also if there were any IV on our adjustments plus or minus.
Yes, so the claim rate assumption again.
The 1 caveat, Jeff that I think we've given consistently.
Which is we don't apply a blanket homogeneous default to claim rate assumption on new defaults every loan has its own characteristics and we individually evaluated all 8764 defaults as of June 30, including the roughly 1100, new defaults that came through that said I know, it's something that's been focused the average default.
Claim rate on those new notices the 1100, new notices roughly in the period was was 13%.
And as you noted it stands in contrast to the 11% or excuse me the 9% assumption.
That came through in.
In the first quarter.
And just sorry, rogue that average change without any kind of mix issue or is that the company adopting.
And he more conservatism.
Folks such a material change.
Yes.
It's really the underlying risk profile of the loans that came through as new defaults in the quarter is basically the same as what's coming through what has come through in prior periods.
About on the call or on our prepared remarks that roughly 90% of the loans that are in default are also reported to us as being in forbearance and there was no difference in the population.
In the second quarter.
But we've decided to adopt a slightly more conservative posture for new defaults coming through now really because we think there's the potential for different outcomes for borrowers who are facing stress today later in the Covid cycle.
Growers to face stress early on when the enormous funded fiscal and monetary stimulus and other borrower assistance programs were first introduced that's really what's driving it.
Okay.
And then looking to the premium rate, obviously, the net rate bounces around with free.
Insurance higher lines et cetera.
Core premium yield which.
Stretch out all that noise. It looks like it was down over a basis point this quarter now below 39.
Basis points, where do you see that stabilizing as we continue to shift to that.
18 price it.
Jeff, we're not going to give guidance on on where premium yield.
Whether it's on a net basis or a core basis, we've got a little bit less than a basis point of movement on the core yields about <unk> 95, So we can sync up.
We could think up later too.
<unk> worked through the numbers.
The key for US really is that every piece of business that we're bringing on I'll call. It standalone.
Stands on its own from a risk adjusted return on expectation standpoint, and that absolutely remains the case today every piece of business that were bringing on fully aligns with our expectations to deliver strong mid teen returns over time.
And the rate on business and the core yield Thats, obviously built up from all of the individual rate reflects that.
Okay, and then last question, that's probably more of a sensitive topic, but pre.
Pre great recession, the industry. It was really just a risk taker, what the gse's kind of said it was okay. It was kind of on the underwriting seem to accept.
Great recession, you always see in the industry took a differentiated view on higher DTI is for a little bit a few years ago.
What do you think is nationals and the broader industry's ability to continue to.
Price risk the way you want to see FHFA director real broadening of the GSE credit box is that something where the new pricing engines will truly allow you to pick and choose the risk you want or don't want.
Or is there maybe a political pressure that you have to directionally follow the GSE.
Well I'll just.
I'll start there and then.
Adam or quality can weigh in but.
So you.
We just we broadly support all actions that provide qualified borrowers with increased access to homeownership, that's our business.
And we're confident there's a way to help more individuals access homeownership was fair enough equity in sustainability.
And also a way that provides appropriate safeguards to get us a systemic risk and ensures the safety and soundness of the housing finance system.
And you know we have.
Our risk management program.
Talk about many times on 3 pillars of individual loan risk underwriting and rate GPS pricing and comprehensive back in reinsurance.
Allows us to proactively manage the risk outcome for our company.
So incremental risk coming into the origination market doesn't automatically translate to incremental risk coming into our insured portfolio.
And we have the risk and return standards.
We manage towards.
The tool to directly express our risk appetite in the market. So.
We still feel very confident about <unk>.
Conditions in the market and.
What what is being.
Originated from.
GSE.
Guarantee.
And I am probably.
Add on to that when we think about the administration and FHFA and the possibility of.
Broadening of credit market.
The key seems to be sustainability and.
You don't the last thing I believe that the administration of RSA Chelsea wants to do is to set up a bar for the wrong mortgage.
Access to homeownership.
Doesn't mean that you go down the credit curve.
Necessarily say I would find that hard to believe based on what we're hearing from both a administration FHFA.
Okay helpful. Thank you.
Sure.
There are no further question on queue you may continue.
Thank you again for joining us we will be participating virtually in the Barclays Financial services Conference on September 13th and the Zelman housing summit on September 21, we look forward to speaking with you soon.
This concludes today's conference call. Thank you for participating you may now disconnect.
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