Some mortgage ILS’ triggered as delinquencies soar due to Covid-19

Three sponsors of mortgage insurance-linked securities (ILS) transactions have warned investors in the mortgage insurance linked notes that elevated loan delinquency levels in May 2020 have triggered their deals.

The three sponsors in question are Radian Guaranty, National Mortgage Insurance Corporation and MGIC Investment Corporation, each of which have visited the capital markets with mortgage ILS issuances a number of times to secures excess-of-loss reinsurance protection for their mortgage insurance portfolios.

The data shows a sharp increase in mortgage loan delinquencies in the United States in May 2020, with in some cases the number of new loan delinquencies being more than seven times the number reported in April.

It’s a sign of the impacts of the Covid-19 pandemic becoming clearer in employment and therefore having a knock-on effect on people’s ability to maintain payments on their mortgages, which in time will likely drive higher mortgage insurance claims for the private insurers in the U.S.

The private mortgage insurers have been tapping the capital markets using a catastrophe bond or ILS type structure, securing fully collateralised excess-of-loss reinsurance coverage for their portfolios from third-party investors.

At this stage, it doesn’t appear that there has been any specific loss of principal suffered by investors in the mortgage ILS deals that have been triggered or activated due to the rise in delinquencies, but a triggering event has been announced and so the amortisation of the notes principal is halted while the claims begin to be counted.

Radian Guaranty highlighted the role of the pandemic in driving much higher new delinquencies during May 2020, as it began the month with 22,790, but added 35,915 more during the period.

Radian has three mortgage ILS deals in-force, at launch these were a $434m Eagle Re 2018-1 Ltd., a $562m Eagle Re 2019-1 Ltd. and its most recent $488m Eagle Re 2020-1 Ltd. transactions.

Radian explained, “The outstanding reinsurance coverage amount will stop amortizing if certain thresholds, or triggers, are reached, including a trigger based on an elevated level of delinquencies as defined in the ILN transaction agreements.”

Further adding that, “Based on the current level of defaults reported to us, the ILNs are currently subject to a delinquency trigger event that is being reported to ILN investors on June 25, 2020. The amortization of principal of the ILNs issued by the Eagle Re Issuers has been suspended and will continue to be suspended during the continuation of the trigger event.”

Next, MGIC Investment Corporation, who also noted the role of Covid-19 in driving mortgage loan delinquencies much higher in May.

MGIC was dealing with 30,243 loans in delinquency at the start of May 2020, but by the end of the month had added 31,117 more.

MGIC has two in-force mortgage ILS deals, at launch these were a $319m Home Re 2018-1 Ltd. and a $316m Home Re 2019-1 Ltd.

Both are affected and now triggered by the rising delinquencies, with MGIC explaining that, “A “Trigger Event” has occurred, effective May 31, 2020, because the reinsured principal balance of loans that were reported delinquent, as provided in the ILN documents, exceeded 4% of the total reinsured principal balance of loans under each transaction.

“While the “Trigger Event” is in effect, payment of principal on the related notes will be suspended and the reinsurance coverage available to MGIC under the transactions will not be reduced by such principal payments.”

Finally, National MI, which has three mortgage ILS deals still in-force, the at launch $211m Oaktown Re Ltd. (Series 2017-1), $265m Oaktown Re II Ltd. and $327m Oaktown Re III Ltd. deals.

All three of the outstanding Oaktown mortgage ILS are subject to triggering though, albeit one only on a credit enhancement basis, with National MI saying, “Based on delinquency information currently reported to NMIC, the 2018 ILN Transaction and the 2019 ILN Transaction will be subject to a delinquency trigger event that is being reported to ILN investors.”

National MI’s first Oaktown Re Ltd. ILN transaction from 2017 is also subject to a credit enhancement trigger event, as the credit enhancement of the reinsurance coverage has fallen below a pre-agreed target percentage and delinquency is also elevated.

Investors in these mortgage ILS transaction will now be watching closely for the mortgage delinquency levels to be reported at the end of June, to see how much further they rise and whether any activation of the reinsurance coverage occurs.

At this stage there is no news from the other sponsors of mortgage ILS deals, Arch Capital and Essent Guaranty.

Both will certainly be facing elevated delinquency levels within the portfolio of mortgages their insurance policies cover, so there is every chance some of their mortgage ILS transactions also face triggering as the number of loan delinquencies continues to rise due to Covid-19.

As we reported yesterday, the mortgage ILS market has re-opened with Arch Capital managing to get its latest Bellemeade Re deal away, despite continued capital market volatility.

It may have been good timing by Arch, as it remains to seen how supportive investors would be of new mortgage ILS deals now the evidence on rising mortgage loan delinquencies is clear.

Details on every mortgage insurance-linked notes issuance can be found here in our Deal Directory.