Is Now the Time to Buy Mortgage Insurers

Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

According to Fannie Mae and Freddie Mac, the number of mortgages past due is falling across the country. Certain states, however, still have a high number of borrowers who are behind on their payments.

In the first quarter, Fannie's serious delinquency rate, which measures the percentage of the entities overall loan book that is at least three payments past due or in the foreclosure process, fell to 3.02%, compared to 3.67% during the same period last year. The trend has been the same for Freddie, which resisted a serious delinquency rate of 3.03% out of the company's whole loan book during the first quarter compared with 3.51% in the same period last year.

In addition, borrowers' credit scores have trended steadily higher and delinquencies are working their way out of the system as home prices rise and borrowers are able to recoup some of the lost equity on their buildings.

Indeed, it is not just Fannie and Freddie that are seeing an improvement in their underlying loan book. The three main publicly listed mortgage insurers are also registering strength in the mortgage market. Genworth Financial (NYSE: GNW) Radian (NYSE: RDN) and MGIC (NYSE: MTG) have all noted a fall in the number of delinquent mortgages on their books as well as a gradual increase in the amount of new business written for the last few months.

Is it time to invest?

So, is it time to invest in these insurers? They have certainly been on a good run over the past year or so. Year to date, MGIC is up 127%, Radian is up 91% and Genworth has gained 58%, but is there any upside left?

Investors need to be careful around these companies, as while the storm clouds might be lifting, the sun is not yet out. For example, an extract from MGIC's first quarter results release

We have reported net losses for the last six years, expect to continue to report annual net losses, and cannot assure you when we will return to profitability…..For the first quarter of 2013, we reported a net loss of $73 million. We currently expect to continue to report annual net losses…..Although we currently expect to return to profitability on an annual basis, we cannot assure you when, or if, this will occur. ...The net losses we have experienced have eroded, and any future net losses will erode, our shareholders’ equity and could result in equity being negative.

This does not inspire confidence in the company.

However, Wall Street analysts are slightly more positive, and predict the company to register a small profit of $0.19 per share in 2014, although analysts expect the company to report a loss of $0.67 per share for this year.

Expectations are similar for Radian. The company is expected to report a loss this year of $1.00 per share but return to profit during 2014, with EPS of $1.00. These estimates for both companies have remained constant for the past year, signifying that analysts have a small amount of confidence in the companies ability to achieve the predicted results. Enough confidence at least not to revise estimates downwards.

On the other hand, analysts are less bullish on Genworth. Unfortunately, in this case, Genworth's diversification has been its downfall. The company's operations involve life insurance, health insurance and international mortgage insurance. In particular, the company is exposed to the Australian and Canadian housing markets, which are currently considered by some to be in a bubble state.

Analyst estimates for Genworth's earnings per share for this year have been reduced from $1.44 predicted at the beginning of the year, to around $0.98 predicted now. Estimates for 2014 EPS have remained constant at around $1.40. That said, even if Genworth's EPS for this year come in at the lower end of expectations ($0.98), the company will have achieved year-on-year EPS growth of 51%.

As the chart shows, Radian and MGIC have seen the quality of their inventory improve as delinquency rates fall and this is expected to continue as the linear forecast trend lines show.

MGIC has seen its number of delinquent loans fall 6% during the last three months and Radian has noted a 7% fall.

In addition, Radian has noted a 28% rise in the total value of new insurance written and MGIC has noted a 17% rise -- this figure is only for the last few months. (The linear line is a growth forecast for the next two periods.)

Meanwhile, Genworth has also noted a decline in the number of delinquent loans on its books. That said, the company's US mortgage division only accounts for a very small portion of the company's overall business. Still, an improvement in the company's US mortgage division, no matter how small, will only add the company's bottom line.

Genworth has seen the number of delinquent loans on its books fall 21% during the last year, accelerating in the first three months of this year, where the number fell 9.3%. The company has noted a fall in new insurance written however.

Foolish summary

Even though the mortgage and housing market may look to be improving, investors need to be careful with these insurers, which still look to be risky investments. Indeed, Genworth is currently the only company that is profitable and the company's outlook is mixed. All in all it would be wise to stay away until there is more clarity in the sector. 

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Fool contributor Rupert Hargreaves owns shares of Genworth Financial. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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