... Like most things in life, the beauty of situations like this are that they are not black and white. Often you can find something you're on the bearish side of for instance, but the market can be potentially far more bearish than you. It's all about probabilities and nuances by that stage.
Thanks craft, I haven't go around to checking out Genworth US yet. I'm sure their story is a rollercoaster given what happened in the last decade.
Genworth US is a very different business to GMA - a worse business, although it too is extremely cheap. Genworth US has a long term care insurance business which has turned out to be a real dog. GMA, by contrast, is a straight mortgage insurer.
I think, when looking at GMA, naturally one needs to weigh the prospect of a serious housing downturn occurring in Australia. But any assessment of that probability needs to be realistic.
If one is going automatically to use the US subprime mortgage crisis as the measure of how bad things could get in Australia, one needs first to show just why the US subprime crisis is an applicable example. Too often, the US subprime crisis is evoked in the context of the booming Australian property market simply because it is the most recent housing crisis one can think of. But that is just lazy analogizing: like generals who are always preparing for the last war. Instead, one should be asking whether the most important conditions that caused the housing bubble to grow as big as it did in the US and to pop as spectacularly as it did are present in more or less the same form in Australia.
It does not follow that, simply because house prices may fall, a wave of defaults ensues. Studies have shown that house prices need to fall to an extent that places the mortgagor deep in negative equity before mortgage defaults turn from a trickle into a tsunami. In fact, even when mortgagors are in negative equity, most fight tooth and nail to keep their home. The decisive factor on whether they continue to do so is their ability to continue to service the mortgage.
Sure, we have low interest rates in Australia. We have an RMB securities market that allows lenders to securitize mortgages and get them off their books. Both were necessary but not sufficient conditions for the US subprime crisis. But I haven't seem anything like the deterioration in lending standards in Australia that preceded the US subprime crisis. Also, the "
crisis" part of the US subprime crisis was the collapse in property values. Most subprime borrowers had very little or no equity in their homes and were on adjustable-rate mortgages. So when the US Fed began raising rates in 2006, these borrowers could not refinance their mortgages and were stuck with the higher adjusted rate, resulting in a wave of defaults. That, in turn, caused property prices to collapse. Property prices collapse only because there are a wave of sellers desperate to sell and no buyers.
This last aspect is important because, as things currently stand, GMA's claims costs have been going down largely due to the fact that, where mortgagors default and the property is sold, the rise in property values has allowed GMA to recover almost all of its claims costs. Thus, between 1H2013 and 1H2015 GMA's average claims cost has gone down from $80,000 to $49,000.
This is not to say that Australian property prices will not decline. But what is required is a decline
and a meaningful uptick in defaults and one does not inevitably follow the other. There is an uptick in defaults in certain parts of Australia - most notably in the mining states. But this is a very small part of the Australian mortgage market. Defaults in Sydney and Melbourne which receive the most press coverage over rising property prices have remained fairly stable over the last several years.
Across Australia, GMA has seen mortgage defaults since June 2013 go from 0.34% to 0.40%. There is a trend here. But whether that trend continues and becomes meaningful remains to be seen. For those who think it will, GMA is probably a stock to be avoided. But for those who think it won't, GMA offers a pretty attractive risk/reward proposition at its current level, in my view.