Genworth makes plans for potentially necessary mortgage insurance IPO in a rough economy

Indicators that the mortgage industry will need support shot through the week of increasingly somber economic news, an outlook that will have implications for an insurer’s potential IPO, as part of its back-up plan to confront its debt.

Federal Reserve Board Chairman Jerome Powell said during a press conference July 29 that the U.S. government has been “purchasing sizable quantities of Treasury and agency mortgage backed securities in order to support orderly conditions in the markets.
The Fed plans to boost its holdings of Treasury and agency MBS, Powell stated, indicating lagging investor interest.

Genworth Financial, a long-term care, life and mortgage insurer, announced as part of its second-quarter earnings report July 29 that new mortgage delinquencies increased significantly in that quarter due to the Covid-19 pandemic, rising the most in May.

These new delinquencies resulted in $170 million of loss expense in the second quarter, Genworth stated. U.S. mortgage insurance losses totaled $228 million were fueled by COVID-19 delinquencies, the company stated.

However, premium flow was good with a greater amount of purchases as well as refinances under the Fed’s flat interest rates.

“Total flow delinquencies increased from 15,246 to 53,372 sequentially driven by 48,249 new delinquencies in the quarter,” Genworth said in its press release accompanying the earnings statement. Of these delinquencies, 87% are part of the CARES Act forbearance plan, so the company expressed optimism that many of those with stalled payments may resume them if the economic situation in the U.S. improves.

However, a day later, July 30, the Bureau of Economic Analysis announced that the real gross domestic product (GDP) suffered a drop of 32.9% in the second quarter due to the pandemic, an unprecedented plunge. The Department of Labor had recently announced unemployment claims rose to 1,434,000, in the week ending July 25, an increase of 12,000 from the previous week’s revised level.

Under the CARES Act, those who have faced hardship under the pandemic are eligible for forbearance on their mortgage payments in whole or in part for up to a year.

The company is hoping that higher “cure” rates in the second half of 2020 will take hold, if the market becomes more active and borrowers become more stable.

However, Powell said as part of his macroeconomic outlook that even if the reopening underway goes well, it will still be rough for the many without jobs and outside support of some kind will be required in order for people to hold on to their homes. Employment levels are usually commensurate with mortgage industry health. 

“Many of those people are going to find it hard, they can’t go back to their old job, there won’t be enough jobs for them … they’re going to need support if they’re to be able to pay their bills to continue spending money to remain in their current rental house or apartment or house if they own it,” the Fed chairman said. 

However, there has been incremental improvement in loan payment forbearance experience, according to the Mortgage Bankers Association’s most recent survey, which covers July 13 through July 19, 2020, the total number of loans now in forbearance dropped by 6 basis points of to 7.74% of loan volume. The MBA estimates that 3.9 million homeowners are in forbearance plans. Its survey represents 75% of the first-mortgage servicing market or 37.3 million loans.

Meanwhile, Fannie Mae and Freddie Mac loans in forbearance trimmed their numbers for the 7th consecutive week to 5.49%, a 15-basis-point improvement, according to the MBA.

These home loan trends comes at a time when Genworth is moving forward with a plan to IPO almost 20% of its U.S. mortgage insurance business if plans to be acquired by long-time suitor China Oceanwide fail. The Richmond-based insurer needs money to pay off its $1 billion of debt maturing in 2021 as well as an expensive settlement agreement with AXA on mis-selling losses under two payment protection insurance units AXA bought from Genworth back in 2015. Genworth has issued a promissory note to AXA of about  £317 million, with two installments due in and around mid-2022. It has already paid AXA $125 million earlier in July as part of the settlement. 

The merger closing process is nearing its fourth year and is now almost entirely dependent on the Chinese conglomerate’s ability to show Genworth the money to fund the deal. Specifically, Oceanwide must prove to Genworth by Aug.31 that it has access to $1 billion from mainland China and another $1 billion or more from investors or other funds outside of China. 

Genworth used funds from the partial sale of its Canadian mortgage insurer in the fall    to pay off Genworth’s $445 million 2018 secured debt and address $397 million senior debt due in June 2020, reducing its debt to about $2.8 billion.