The mortgage insurance-linked securities (ILS) market has demonstrated its resiliency through the COVID-19 pandemic, as issuance came back to market despite the uncertainty created by a sharp increase in delinquencies, according to rating agency Fitch.
Fitch explains that the elevated levels of delinquencies are partly due to the enactment of the Coronavirus, Aid, Relief and Economic Security (CARES) Act in the United States Congress in March 2020.
This bill gave mortgage loan forbearance to borrowers for up to 12 months and combined with the pandemic this has driven mortgage delinquencies sharply higher in 2020.
That showed one benefit of the mortgage ILS structure, Fitch said, demonstrating the effectiveness as a number of outstanding mortgage ILS deals had their amortisation suspended, effectively holding the reinsurance protection back for the sponsors until clarity over any potential losses emerges.
“The increase in delinquencies has been significant enough to trigger the suspension of principal amortization for several outstanding MILN. Principal amortization remains suspended until it is either paid to the ceding insurer in the form of reinsurance loss payments or until delinquencies fall back below the trigger level. Fitch views this positively from the USMI’s credit perspective because it demonstrates the effectiveness the MILN structure,” the rating agency explained.
Further noting that, “Principal forbearance is not an event of default for MILNs, but is a deviation of expected cash flows for investors.”
This trigger, which almost traps the collateral for the sponsors, as we see in property catastrophe insurance-linked securities (ILS) as well, is a useful structural feature as the reinsurance protection from mortgage ILS amortise away over time.
Also positive for the mortgage ILS market is the fact issuances of mortgage insurance-linked notes have continued after a short hiatus, even while the pandemic persists.
“Although the spreads on these notes reflect the elevated risk, Fitch views the ability to close new transactions during the pandemic as a positive reflection on the resilience of the MILN market,” Fitch says.
Adding, “As MILN demonstrate their effectiveness as a source of reinsurance to mortgage insurers and simultaneously remain an attractive structure to investors, Fitch expects all USMIs to continue to use MILN for reinsurance purposes.”