Rating agency Moody's Investor Services just provided the strongest indication yet that it is worried about the Australian housing market, given its recent downgrade of Genworth Mortgage Insurance Australia's (ASX: GMA) insurer financial strength rating.
Moody's downgraded Genworth from A3 to Baa+ on 'tail risks' and the risk of a 'sharper than expected' downturn in the Australian housing market. The downgrade comes on the heels of the company's recent downgrade of Australian bank credit ratings.
Curiously, Standard & Poors (S&P) and Fitch both maintained their Genworth ratings at A+, with Fitch having a stable outlook and S&P maintaining a negative outlook. Genworth stated that Moody's rating was 'unsolicited', implying that the company has paid S&P and Fitch to rate it. We have seen in the past that there can be conflicts of interest with this kind of thing.
We have also seen in the past that Moody's was a key architect of some woeful credit ratings during the global financial crisis. I would imagine that it has a strong institutional imperative to never be accused of being asleep at the wheel during another housing bust. Bizarrely though, Moody's seems a few years late to the party, given its comments on the risks associated with high levels of interest-only lending – risks that are already being reduced due to the intervention of APRA.
What's an investor to do?
Rather than get hung up on what the ratings agencies think or say, investors need to think about their tolerance for risk and their beliefs around the Australian housing market. If you think, for example, that the property market is heading for a blow-up, you should avoid Genworth at all costs.
The company makes money primarily by selling lenders mortgage insurance (LMI) on new loans, and is responsible for paying back losses to the lender in the event that the borrower defaults and the lender can't recover all their money (e.g. by selling the property). So if there is a big property crash, Genworth is potentially on the hook for billions, and its ability to write new business will be impaired, at least in the short term.
Investing is all about trying to find an attractive upside/income stream with lower risk, and Genworth in my opinion simply doesn't fit the bill.
