Analyst Downgrades 2 Mortgage Insurers, Names Top Stock Pick

Now that third-quarter earnings season is over for the mortgage insurance, one analyst refreshed his coverage for the group on Wednesday, including issuing two downgrades.

The Analyst: Bank of America analyst Mihir Bhatia issued the following changes to his mortgage insurance coverage:

• MGIC Investment Corp. MTG downgraded from Buy to Neutral, price target raised from $16 to $16.50.
• Radian Group Inc RDN downgraded from Buy to Underperform, price target cut from $25 to $22.50.
• Enact Holdings Inc ACT reiterated at Neutral, price target raised from $23 to $23.50.
• Essent Group Ltd ESNT reiterated at Buy, price target reiterated at $53.

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The Thesis: In the downgrade note, Bhatia said he is increasingly concerned about the execution risk at Radian and noted growth investments could weigh on profitability and return on equity. For MGIC, Bhatia said he simply sees limited valuation upside from current levels based on his updated earnings projections.

“While the housing credit environment remains favorable and demographic tailwinds should drive solid first-time homebuyer volume (key MI users), lower premium rates are inhibiting top-line growth,” he said.

Investor concerns over the highly competitive environment and lower premium rates in the longer term are also weighing on valuations. Bhatia said he is now relatively neutral on the MI group as a whole after being bullish on the group since the beginning of the pandemic in 2020.

He remains bullish on top pick Essent Group, which he believes could see outside returns in the next 12 months.

Benzinga’s Take: The housing market and mortgage insurance market have been booming since the Federal Reserve issued emergency interest rate cuts in March of 2020. However, inflation may push the Fed to raise interest rates again sooner than it expected, making mortgages more expensive and potentially slamming the brakes on the housing boom.

Image by Shahid Abdullah from Pixabay