Radian Group (RDN) Risk Analysis

Changes in the GSEs' business practices and other actions of the FHFA and GSEs can significantly impact the functioning of the housing finance system. Because traditional mortgage insurance is an important component of this system and because our businesses depend on the health of the housing finance system and housing markets in particular, these actions have impacted, and future actions could further impact, our business operations and performance. The FHFA has been the conservator of the GSEs since 2008 and has the authority to control and direct their operations. Given that the Director of the FHFA is removable by the President at will, the agency's agenda and its policies and actions are influenced by the then-current administration. The increased role that the federal government has assumed in the residential housing finance system through the GSE conservatorships may increase the likelihood that the business practices of the GSEs change, including through administration changes and actions. Our current business structure is highly dependent on the GSEs, which are the primary beneficiaries of most of our mortgage insurance policies. Changes in the business practices of the GSEs, which can be implemented by the GSEs acting independently or through the FHFA, could negatively impact our business and financial performance. Examples of potential changes that could impact our business may include, without limitation: ¦eligibility requirements for a mortgage insurer to become and remain an approved eligible insurer for the GSEs;¦underwriting standards on mortgages they purchase;¦policies or requirements that may result in a reduction in the number of mortgages they acquire, including benchmarks established by the FHFA for the amount of certain loans that may be purchased by the GSEs;¦the national conforming loan limit for mortgages they acquire, in particular as this limit compares to loan limits set by the FHA;¦the level of mortgage insurance they require;¦the terms on which mortgage insurance coverage may be canceled before reaching the cancellation thresholds established by law, including if the GSEs change or expand their cancellation practices as a result of policy goals, changing risk tolerances or otherwise;¦the terms required to be included in mortgage insurance policies that cover the loans they acquire, including limitations on the ability of mortgage insurers to mitigate losses on insured mortgages that are in default;¦the programs established by the GSEs that are intended to avoid or mitigate loss on insured loans;¦the amount of loan level price adjustments or guarantee fees, which may result in a higher cost to borrowers, that the GSEs charge on loans that require mortgage insurance; and ¦the degree of influence that the GSEs have over a mortgage lender's selection of the mortgage insurer providing coverage. The GSEs have changed their business practices to support equitable access to, and affordability of, mortgage credit, in particular to low- and moderate-income borrowers and underserved communities. See "Item 1. Business-Regulation-Federal Regulation-Housing Finance Reform and the GSEs' Business Practices." As required by the FHFA, each of the GSEs has prepared and filed three-year Equitable Housing Finance Plans that describe each GSE's planned efforts to advance equity in housing finance, including proposals to reduce mortgage costs for historically underserved borrowers. In accordance with their plans, both Fannie Mae and Freddie Mac have launched their own Special Purpose Credit Programs ("SPCPs") and have worked with lenders to purchase loans originated through lender SPCPs. While details on any future changes remain uncertain, both Fannie Mae's and Freddie Mac's plans note that their programs could consider modifications to mortgage insurance requirements. The plans also include expected activity to address alternative credit and data in underwriting, property appraisals, and title insurance, among others. The FHFA and GSEs expect to continue to update these plans annually. To implement these plans or to otherwise support the FHFA's mandate regarding increasing the accessibility and affordability of mortgage credit, the GSEs may pursue new products and activities, or alter existing policies and practices, including in ways that could negatively impact Radian Guaranty's IIF, results of operations or financial condition. In addition, in furtherance of these policy objectives, Radian Guaranty and/or one or more of the mortgage insurers may pursue initiatives outside of their customary business activities, the success of which may be measured based on how well the initiative was able to advance accessibility and affordability of mortgage credit rather than by traditional profitability and return measures. See "Item 1. Business-Regulation-Federal Regulation-Housing Finance Reform and the GSEs' Business Practices-Administrative Reform-Access and Affordability" for further discussion regarding these and other changes to the GSEs' business practices. In February 2022, the FHFA finalized the ERCF, which establishes new increased capital requirements for the GSEs, and the FHFA also has proposed new liquidity requirements for the GSEs. Since finalizing this rule, FHFA has adopted several amendments to the ERCF, most recently by a rule adopted in November 2023. See "Item 1. Business-Regulation-Federal Regulation-Housing Finance Reform and the GSEs' Business Practices" for further information. Taken together, compliance with the increased capital requirements imposed by the ERCF and the proposed new GSE liquidity requirements could significantly alter the business practices and operations of the GSEs, including potentially resulting in an increase in GSE pricing and a decrease in their use of credit risk transfer. An increase in GSE pricing could make alternatives to the GSEs such as FHA insured loans or the private securitization market more attractive, which could reduce the GSEs' market position and reduce the number of loans available for private mortgage insurance. Further, the GSEs may seek to amend the PMIERs financial requirements in the future to better align with the ERCF and the proposed GSE liquidity requirements, once finalized. Changes to the PMIERs to better align with the ERCF could include: (i) an increase in the level of Radian Guaranty's required capital and (ii) a decrease in the amount of PMIERs' capital relief that Radian Guaranty receives for existing or future credit risk transfer transactions, including reinsurance or mortgage insurance-linked notes transactions. It remains uncertain if, when and how the PMIERs ultimately may be amended to better align with the ERCF. For a discussion of these and other potential changes to the PMIERs, see "Item 1. Business-Regulation-Federal Regulation-GSE Requirements for Mortgage Insurance Eligibility." The GSEs have in the past and may in the future offer new products and activities in pursuit of their business strategies, including credit risk transfer transactions and structures that compete with private mortgage insurance. If these products or credit risk transfer transactions and structures were to materially displace primary loan level or standard levels of mortgage insurance, the amount of mortgage insurance we write may be reduced, which could negatively impact our franchise value, results of operations and financial condition. See "Item 1. Business-Regulation-Federal Regulation-Housing Finance Reform and the GSEs' Business Practices" for further discussion, including with respect to a final rule released by the FHFA regarding the process for how it will consider and approve new GSE activities and products. The structure of the residential housing finance system could be altered in the future, including as a result of comprehensive housing reform legislation. Since the FHFA was appointed as conservator of the GSEs, there has been a wide range of legislative proposals to reform the U.S. housing finance market. In conjunction with these proposals, there has been ongoing debate about the roles that the federal government and private capital should play in the housing finance system. To the extent new legislative action alters the existing GSE charters without explicit preservation of the role of private mortgage insurance for high-LTV loans, our business could be adversely affected. See "Item 1. Business-Regulation-Federal Regulation-Housing Finance Reform and the GSEs' Business Practices" for a discussion of the future of housing finance in the U.S., including potential objectives for future reform. Although we believe that traditional private mortgage insurance will continue to play an important role in any future housing finance structure, developments in the practices of the GSEs, including potentially new federal legislation, changes to existing statutes, rules or regulations, or changes in the GSEs' business practices that reduce the level of private mortgage insurance coverage used by the GSEs as credit enhancement, or even eliminate the requirement, may diminish the franchise value of our mortgage insurance business and materially and adversely affect our business prospects, results of operations and financial condition.