President Donald Trump's executive order on housing might not have a significant impact on home affordability, but it is certainly a relief for mortgage insurance stocks.
Shares of mortgage insurers including Enact Holdings, Essent Group, MGIC Investment Corp., and Radian Group rose between 1.5% and 4% on Friday.
The catalyst appeared to be an executive order that Trump signed Thursday. The stocks' move, however, wasn't driven so much by what the order said, but by what it didn't.
The White House billed the executive order as a way to make homeownership more affordable. As part of the order, the Federal Housing Finance Agency, which controls mortgage giants Fannie Mae and Freddie Mac, will start a pilot program that reviews single-family mortgages and periodically determines if the loans are eligible for mortgage insurance cancellation.
The move could have been a big problem for private mortgage insurers. Borrowers who make down payments of less than 20% on a home typically have to buy such insurance for loans backed by Fannie or Freddie. Private mortgage insurance shows up as an additional cost in a mortgage payment.
Right now, a mortgage servicer often is supposed to automatically cancel the insurance once the principal balance of the loan reaches 78% of the original value of the home. Borrowers can also request to cancel the insurance earlier based on the current value of the home, but have to arrange for an appraisal that shows the home has appreciated.
The pilot program, as outlined in the order, would let Fannie and Freddie proactively use their internal valuation models to detect when borrowers' homes have appreciated enough to allow for cancellation. But crucially, the final text of the order limited the pilot only to loans going forward, rather than apply the program retroactively.
Applying the pilot to existing loans could have been rough for private mortgage insurers. A wide swath of the loans they back could have started going under regular reviews for cancellation, cutting insurers' revenue. Shares of many insurers dropped earlier in the week after reports that the order would include such reviews.
"The proposal for mortgage insurance cancellation seems more benign than expected," wrote Keefe, Bruyette and Woods analysts in a research note.
The lack of retroactivity also likely means the provision won't have that much of an impact on housing affordability in the near term. High mortgage rates are already suppressing borrowers' appetite for homes. After the FHFA establishes the pilot, it could take years before a significant number of new borrowers start hitting the thresholds for cancellation, barring a boom in home prices.
The FHFA didn't immediately respond to a request for comment on whether the agency could consider making the program retroactive later on.
Mortgage insurers and every other company involved in the lending process will continue to be under the microscope as the White House searches for ways to reduce costs. But for now, the insurers appear to have dodged a bullet.
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