Real Estate

Mortgage Insurer Enact’s IPO Is Back On Track

With investors showing renewed confidence in the industry, Genworth Financial is again ready to move forward with plans to sell part of its mortgage insurance subsidiary in an initial public offering.

Genworth delayed the IPO of subsidiary Enact Holdings Inc., in May, citing “significant trading volatility in the mortgage insurance sector” as a whole.

All six of the nation’s biggest mortgage insurers are publicly traded, and have seen ups and downs in their share prices during the pandemic, as they were forced to build up their loss reserves to cover a potential surge in foreclosures.

But most homeowners who put their mortgage payments on hold during the pandemic have now exited forbearance, and investors have been bidding up the share prices of mortgage insurers. Genworth this week said it would move forward with plans to sell 13.31 million shares of Enact common stock at between $19 and $20 per share.

That’s down from expectations of $20 to $24 per share in May. But Genworth said it expects that deal underwriters will exercise a 30-day option to purchase another 2 million shares.

At the midpoint of the expected IPO price, $19.50, the IPO would raise $286 million, and Enact would have a market capitalization of $3.2 billion, with 162.84 million shares outstanding.

Genworth has also lined up a potential private sale to investment funds managed by Bayview Asset Management LLC. Bayview has agreed to purchase 14.65 million shares of Enact if the IPO share price is less than or equal to $22, or 4 million shares if the IPO price is greater than $22 but less than $24 per share.

Proceeds will be used to pay down debt owned by Genworth, which is an insurance holding company that also provides long-term care insurance.

After the IPO, Enact will trade on the Nasdaq Global Select Market under the ticker “ACT,” with Genworth retaining a controlling stake of about 82 percent in the company after the public and private placements.

Competition in mortgage insurance industry

Mortgage giants Fannie Mae and Freddie Mac require private mortgage insurance when homebuyers put down less than 20 percent on a home purchase, or if homeowners have a loan-to-value ratio that exceeds 80 percent when refinancing. Business has been booming during the pandemic, first because low interest rates generated a wave of mortgage refinancing, and then due to a surge in pent-up demand among homebuyers.

Enact — formerly Genworth Mortgage Insurance Corp. — boosted new insurance written by 60 percent in 2020, making it the nation’s fifth biggest mortgage insurer, after Arch MI, MGIC, Essent, and Radian.

New insurance written by top six private mortgage insurers | Source: Annual reports (MGIC, Essent, Radian, Genworth, National MI) and 2019 and 2020 Arch supplemental SEC filings.

In an investor prospectus, Enact Holdings said “competition on price remains highly competitive” among the six active U.S. mortgage insurers.

“By mid-2019, the use of proprietary risk-based pricing models became widespread in the mortgage insurance industry,” Enact executives noted. “As opposed to traditional rate card pricing, mortgage insurance premium rates in these risk-based plans are visible only to customers and cannot be seen by competitors. Mortgage insurance companies may view this lack of transparency as a means to gain market share by lowering price. Lack of pricing transparency could cause other mortgage insurance companies to respond aggressively and cause further lowering of premiums.”

The private mortgage insurance industry as a whole has been gaining market share against its main competitor, the Federal Housing Administration, as increases in FHA premiums made “PMI,” or private mortgage insurance, a more attractive option.

According to data analyzed by the Urban Institute, all but about one-third of purchase mortgages (32.2 percent) backed by Fannie Mae and Freddie Mac in 2020 were covered by some form of mortgage insurance.

Source of mortgage insurance on purchase loans guaranteed by Fannie Mae and Freddie Mac

Source: Urban Institute.

Private mortgage insurance (PMI) backstopped 33.2 percent of Fannie and Freddie purchase loans last year, while 20.5 percent had FHA insurance and 10.9 percent were covered by the U.S. Department of Veterans Affairs (VA). The Department of Housing and Urban Development’s Office of Public and Indian Housing (PIH) and the U.S. Department of Agriculture (USDA) insured the remaining 3.2 percent.

Increases in FHA premiums have helped private mortgage insurers pick up market share in recent years.

Market share of major mortgage insurance providers

Source of mortgage insurance on purchase loans guaranteed by Fannie Mae and Freddie Mac, 2015-2020. Source: Urban Institute.

Looking at Fannie and Freddie purchase loans with some form of mortgage insurance, private mortgage insurers have increased their market share from 38 percent in 2015 to 51.4 percent last year. FHA’s market share has fallen from 44.5 percent to 31.7 percent during the same period.

FHA premiums went up after the 2007-09 housing crash and recession put many homeowners in foreclosure. FHA’s upfront premiums, which were equal to 1.5 percent of the mortgage balance before the housing crash, increased to 2.25 percent in 2010. Annual premiums increased from 0.5 percent to 1.35 percent in 2013.

After the FHA’s finances improved, the Obama administration reduced annual premiums to 0.85 percent in 2015, with most borrowers also paying upfront premiums of 1.75 percent.

The Biden administration’s Secretary of Housing, Marcia Fudge, told Congress this spring that HUD has “no near-term plans to change FHA’s mortgage insurance premium pricing.”

But with the FHA’s finances continuing to improve, the National Association of Realtors and other industry groups support legislation that would reduce FHA premiums.

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