COVID-19 spillover to impact mortgage

With mortgage delinquency rates expected to dramatically increase due to COVID-19 pandemic-related forbearance and job loss, AM Best has explored the spillover effect into the mortgage-related activities of the reinsurance industry.

Reinsurers have been assuming incrementally more US mortgage risk from two main sources: government-sponsored enterprises such as Fannie Mae and Freddie Mac (gses); and private mortgage insurers. In recent weeks since the start of the outbreak, jobless claims have skyrocketed, resulting in the highest unemployment rate since the Great Depression. Although the CARES Act and loan forbearance, deferral and modification programs are designed to moderate the impact of the pandemic on borrowers, mortgage delinquencies nevertheless are expected to soar. Although the rate with which loans move from delinquency to claims is not clear at this point due to the unprecedented nature of the pandemic, it is inevitable that higher losses are in the cards for the gses and private mortgage insurers. Factors that affect the primary mortgage market also influence the broad secondary markets, such as mortgage-backed securities and mortgage reinsurance.

The report further explains how the dynamics of the capital markets, the rise in mortgage losses and pmiers compliance all interact to affect the supply and demand of mortgage reinsurance. Finally, the report addresses the issue of how the fallout of the pandemic may affect the capitalization and operating performance of reinsurers that cover mortgage risk.