Fitch Says Mortgage Insurers Will See ‘Limited’ Earnings Pressure from Catastrophes

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Fitch Ratings, New York, said recent natural catastrophe activity from wildfires and hurricanes will likely incrementally increase mortgage delinquencies, but will have a relatively immaterial effect on ultimate paid claims experience and ratings for mortgage insurers.

“The ongoing Los Angeles area wildfires and other recent catastrophic events, including Hurricanes Milton and Helene in the Southeast in late 2024, have created significant physical damage to properties and raised questions about borrower ability and willingness to rebuild in the aftermath of such events,” Fitch said in a Fitch Wire report. “Property insurance is expected to be the main source of recovery for affected borrowers, but insurance coverage levels may fall short of rebuilding costs in some cases, creating a financial dilemma for homeowners.”

The report noted mortgage insurance (MI) does not cover claims principally caused by physical damage, including wildfires, floods or other natural disasters; it is designed to protect against borrower credit default. “Master policies outline the conditions for which property damage would preclude an MI claim, including if the property is deemed uninhabitable and if the damaged property is not restored to a condition no worse than when the MI was initiated,” it said.

Fitch said the residual risk of a borrower failing to repay the remaining mortgage principal balance after all servicer risk mitigation efforts have been exhausted resides with the lender/investor on the loan. “Historically, borrower delinquencies resulting from natural disasters had a higher propensity to cure, as federal relief efforts and loan servicer forbearance programs help borrowers remain current on mortgage payments,” the report said. “The higher-than-normal cure rate is reflected in a reduction in the capital requirement in the Private Mortgage Insurer Eligibility Requirements coverage ratio. A 0.3x multiplier is applied to the required asset amount for non-performing loans that are in FEMA declared major disaster areas.”

The report noted the limited amount of mortgage insurance-paid losses experienced following a catastrophic event are likely related to employment market disruption “in a concentrated area affected by the event that leads to an extended period of reduced income for residents.”