Reinsurers brace for spate of mortgage losses, warns AM Best

Mortgage delinquencies are expected to dramatically increase due to the COVID-19 pandemic and the reinsurance industry is bracing for the spillover effect, warns ratings agency AM Best.

According to a new report, since the outbreak of COVID-19 jobless claims have skyrocketed, resulting in the highest unemployment rate since the Great Depression.

AM Best noted that reinsurers have been assuming incrementally more US mortgage risk from two main sources - Fannie Mae and Freddie Mac - the government-sponsored enterprises, and private mortgage insurers.

Analysts believe that the fallout of the pandemic may affect the capitalisation and operating performance of reinsurers that cover mortgage risk.

AM Best revised its market segment outlook for the private mortgage insurance segment to negative in April 2020, owing to the expected increase in losses on mortgages.

"Although the CARES Act and loan forbearance, deferral and modification programs are designed to moderate the impact of the pandemic on borrowers, mortgage delinquencies nevertheless are expected to soar," the agency said. "Although the rate with which loans move from delinquency to claims is not clear at this point due to the unprecedented nature of the pandemic, it is inevitable that higher losses are in the cards for the GSEs and private mortgage insurers. Factors that affect the primary mortgage market also influence the broad secondary markets, such as mortgage-backed securities and mortgage reinsurance."