NMI Holdings, Inc. (NMIH) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon ladies and gentlemen, and welcome to the NMI Holdings Incorporated Second Quarter 2019 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host. Mr. John Swenson, the floor is yours.

Thank you. Good afternoon, and welcome to the 2019 second quarter conference call for National MI. I'm John Swanson, Vice President of Investor Relations and Treasury. Joining us on the call today are Brad Shuster, Executive Chairman; Claudia Merkle, CEO; Adam Pollitzer, our Chief Financial Officer; and Julie Norberg, our Controller. Financial results for the quarter were released after the close of the market today. The press release may be accessed on NMI's website located at www.nationalmi.com under the investors tab. During the course of this call, we may make comments about our expectations for the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about the factors that could cause actual results or trends to differ materially from those discussed on the call can be found on our website or through our regulatory filings with the SEC. If and to the extent the company makes forward-looking statements, we do not undertake any obligation to update those statements in the future in light of subsequent developments. Further, no interested parties should rely on the fact that the guidance of such statements is current at any time other than the time of this call. Also note that on this call we refer to certain non-GAAP measures. In today's press release and on our website we provided a reconciliation of these measures to the most comparable measures under GAAP. Now I'll turn the call over to Brad.

Thank you, John, and good afternoon everyone. I'm pleased to report that in the second quarter, National MI again delivered record financial performance and accelerating momentum in customer development and portfolio growth. We also continued to differentiate with our credit performance, leveraging our broad-based risk management framework, which spans Rate GPS, individual risk underwriting and our comprehensive reinsurance program to deliver industry-leading results. This week, we closed Oaktown Re III, and $327-million insurance-linked note offering, and obtained additional reinsurance coverage on substantially all of our production from June 1, 2018 through June 30, 2019. This was our third ILN transaction and with it, we have now established layered protection against adverse credit losses on essentially all of the business we have ever written. The ILN structure mitigates the potential impact of credit volatility within our insured portfolio and provides us with a deep, secure and efficient source of growth capital to fund our PMIERs needs. Of particular note, the coverage we secured under Oaktown Re III attaches at a credit enhancement level that is approximately 25% lower than the level achieved by other MI issuers on comparable deals in 2019. This means we have effectively cut off the tail of our credit exposure under stress scenarios approximately 25% earlier in our loss and current curve than others in the sector. Our ability to execute our third offering in larger size at a lower price and on better terms highlights the strength of our franchise, the quality of our insured portfolio and the differentiation we have achieved through our comprehensive credit risk management framework. Turning to the broader market, conditions remain favorable in terms of overall mortgage origination volume and the demand for our product, as well as the strength of the underwriting environment. Recent interest rate movements are supportive of increased purchase and refinancing volume and will likely drive incremental home price appreciation going forward. Lower rates are particularly beneficial for first-time homebuyers who have seen an immediate improvement in affordability and access to the market. The rate environment coupled with record low unemployment, solid wage growth and favorable demographic trends bodes well for the broader mortgage market and long-term demand for our product. Shifting to Washington matters. There has been significant focus over the past week on the CFPB's request for comment on the QM patch. The QM patch is currently set to remain in place through January 2021 and plays an important role in ensuring qualified borrowers have access to credit and are given fair opportunity to achieve their homeownership goals. The request for comment also indicated that the CFPB is considering broader changes to the Ability to Pay/Qualified Mortgage rule, a signal that it is focused on revamping the rules, not necessarily curtailing lending to the borrowers who are served by the patch. We believe that the CFPB will arrive at a workable solution that balances access, sustainability and taxpayer protection. We do not expect them to impose a change that severely limits credit access or origination volume. Overall, we have another strong quarter and a great first half and we are well positioned to continue delivering on the goals we set for the business. With that, let me turn it over to Claudia.

Thank you, Brad. In the second quarter, we delivered record performance and once again demonstrated our ability to expand our customer franchise, achieve strong growth in NIW and insurance-in-force and deliver record financial results, all while maintaining our disciplined approach to managing risk and return. GAAP net income for the quarter was $39.1 million, or $0.56 per diluted share, and adjusted net income was $41.4 million, or $0.59 per diluted share, up approximately 50% from the second quarter of 2018. GAAP return on equity was 20% for the quarter, and adjusted ROE was a record 21.2%. We generated record NIW of $12.2 billion in the second quarter, up 76% compared to the first quarter of 2019 and 87% compared to the second quarter of 2018. Monthly NIW was $11.1 billion, up 78% from the first quarter of this year and 94% compared to the second quarter of last year. Overall, private mortgage insurance industry volume benefited from increasing origination activity tied to low rates and a favorable macroeconomic environment. National MI continued to outperform against this favorable backdrop and again delivered NIW growth that exceeded the overall market. Primary insurance-in-force was $81.7 billion at quarter end, up 12% compared to the first quarter and 41% compared to the second quarter of 2018. We continue to achieve the fastest rate of growth in insurance-in-force in the industry by a wide margin. The performance that we achieved in the quarter was organic, driven by strong customer engagement from our sales force, lender recognition of our value proposition and continued excitement about Rate GPS in the market. In the second quarter, we activated 28 new lenders, including four from the top 200. We are now doing business with a broadly diverse group of over 1,000 high-quality originators. Equally as important, we continue to grow with our existing lenders, leveraging our value proposition of certainty and service and our consultative approach to customer engagement to further strengthen our relationships quarter over quarter and capture an increasing share of their MI business. Rate GPS continues to be a standout success with our customers. More than 95% of our lenders are currently using the platform, and over 90% of our second-quarter NIW volume was delivered through the engine. We focused from the outset on transitioning all of our customers to Rate GPS and away from rate cards as quickly as possible. We believe the consistency of our approach has been a key to the traction we've established in the market. More broadly, we are growing our customer franchise every day and in a way that we believe will drive sustainable outperformance. For us, this means a balanced focused on customer service and risk return discipline. We engage with lenders of all types and size, and our approach to all is equal and balanced. We aim to help every lender grow and succeed while, at the same time, maintaining our commitment to credit risk management. We want all lenders to expect and receive best-in-class service from National MI and trust that we will support them with consistency across all market cycles. This winning formula has helped drive our success to date and positions us to continue to perform as we go forward. With that, let me turn it over to Adam.

Thank you, Claudia, and good afternoon everyone. We had another strong quarter and achieved record results across a number of key financial metrics. We generated record NIW of $12.2 billion and continued the rapid growth of our high quality insured portfolio. This drove record net premiums earned of $83.2 million, record adjusted net income of $41.4 million, or $0.59 per diluted share, and record adjusted return on equity of 21.2%. Now to the details. Primary insurance-in-force was $81.7 billion at quarter end, up 12% from $73.2 billion at the end of the first quarter and up 41% compared to the second quarter of 2018. 12 month persistency in the primary portfolio was 86%, down from 87.2% in the first quarter. Assuming the current interest rate environment holds, we expect persistency will trend down modestly through the remainder of the year. Total NIW was $12.2 billion with monthly products contributing $11.1 billion or 91% of our total volume. Purchase originations represented 88% of our volume in the quarter, consistent with our expectation given the rate environment and uptick in overall refinancing activity. Net premiums earned in the second quarter were $83.2 million, up 13% from the first quarter and 35% compared to the second quarter of 2018. We earned $4.5 million from the cancellation of single premium policies in the quarter, compared to $2.3 million in the first quarter. Reported yield for the quarter was 43 basis points, up from 41.7 basis points in the first quarter, reflecting an increased contribution from cancellations and a modest decrease in our reinsurance costs. We expect that net yield will trend between 40 to 41 basis points through the remainder of the year, reflecting approximately one basis point of impact from our third ILN. Overall, we continue to capture business at rates that are supportive of our strong mid-teens returns objective. We continue to use Rate GPS to actively shape the credit mix of our new production in the period. In the second quarter, our concentration of greater than 45 DTI volume was 9%, and our mix of 97 LTV and below 680 FICO volume were 8% and 3%, respectively, all well below the overall market. Rate GPS provides us with a proven tool to manage the flow of risk in our portfolio and an enhanced ability to react as market conditions evolve. We believe our focus on higher-quality risk in recent quarters will help drive differentiated loss performance and greater consistency in our results going forward. Investment income was $7.6 million, up from $7.4 million in the first quarter. Underwriting and operating expenses were $32.5 million in the second quarter, compared to $30.8 million in the first quarter. Expenses for the quarter included $664,000 of costs related to our third ILN offering. We expect an additional $1.7 million of ILN-related transaction costs to come through in the third quarter. Excluding ILN-related transaction costs, our adjusted underwriting and operating expenses were $31.9 million for the quarter. The growth in our adjusted expense base compared to the first quarter primarily relates to the significant ramp in our NIW volume during the period. Our GAAP expense ratio was 39.1% in the second quarter, compared to 41.8% in the first quarter. Adjusting for ILN-related costs, our expense ratio was 38.3%. This is the first period our expense ratio has been below 40%, an important milestone. And the eight-point improvement we delivered compared to the second quarter of 2018 highlights the significant operating leverage embedded in our financial model and the success we have achieved in efficiently managing our cost base. We had 1028 notices of default in the primary portfolio at the end of the second quarter, up from 940 at the end of the first quarter. Claims expense was $2.9 million in the quarter. Our second-quarter loss ratio, defined as claims expense divided by net premiums earned, was 3.5%. The underwriting environment remains healthy, and our in-force portfolio continues to perform better than initially expected and price. Interest expense in the quarter was $3.1 million, and we had a $1.7-million loss from the change in the fair value of our warrant liability. Moving to the bottom line. GAAP net income for the second quarter was $39.1 million, or $0.56 per diluted share. Adjusted net income was $41.4 million or $0.59 per diluted share, compared to $38.5 million or $0.56 per diluted share in the first quarter, and $27.4 million or $0.40 per diluted share in the second quarter of 2018. Year-on-year, we grew both GAAP and adjusted net income by over 50%. Effective tax rate for the quarter was 23.3%. We expect that our quarterly effective tax rate through the remainder of the year will be approximately 23%. Shareholder's equity at the end of the second quarter was $812 million, equal to $11.99 per share, which compares to $752 million or $11.14 per share at the end of the first quarter, and $630 million or $9.58 per share at the end of the second quarter of 2018. Year over year, our book value per share grew by over 25%. GAAP return on equity was 20% in the second quarter, and our adjusted return on equity was a record 21.2%. We continue to organically grow our equity base and capital position at an accelerating pace. In the second quarter, Standard and Poor's upgraded our insurer financial strength and holding company debt ratings by one notch and maintained its positive outlook on our ratings profile. Total available assets under PMIERs grew to $879 million at quarter, which compares the risk-based required assets of $782 million. Excess available assets were $96 million. The ILN issuance we closed this week is not included in these figures as it was completed after quarter end. The $327-million offering will significantly increase our excess position and provide funding runway in future periods. The sizing and timing of our third ILN offering reflect the significant ramp in our NIW volume. The offering, along with our past transactions and broader reinsurance program, are uniquely valuable in that they provide us with a debt-like cost of funding and equity-like loss absorption capacity that helps insulate us from the impact of adverse credit losses under stress scenarios. Our turn offering is particularly notable in this regard. We secured coverage that attaches at a 1.85% credit enhancement level with a weighted average lifetime spread of 236 basis points, both markedly better than has been achieved on any comparable ILN transaction. As a reference, the average credit enhancement level and spread on comparable deals in 2019 is 2.42% and 290 basis points, respectively. We believe that our ability to achieve such a favorable outcome in terms and price ties directly to our individual risk underwriting approach and our use of Rate GPS to target higher quality NIW volume. Our credit enhancement level on an ILN is akin to a deductible. It is the amount of risk we retain before we benefit from the reinsurance coverage. Achieving a deductible that is approximately 25% lower than comparable deals means that we will realize a reinsurance benefit at a far lower loss level, and our balance sheet will benefit from loss protection at a far earlier stage than has been achieved on other transactions. This provides us with a direct benefit in the event of a severe stress scenario. If a replay of the financial crisis were to occur again today, we estimate that the lifetime loss ratio on our in-force portfolio would be approximately 20%. This means that a stress scenario as severe as the financial crisis is expected to be an earnings event, not a capital event for National MI. In summary, we achieved record results in insurance-in-force, net premiums earned, expense ratio, adjusted net income and return on equity. We successfully completed another ILN transaction, further reducing our cost of capital and extending the coverage available under our comprehensive reinsurance program. As we look forward, we believe that we are well positioned to continue delivering strong midstream returns that are significantly in excess of our cost of capital. We expect that the growing size, attractive credit profile and embedded value of our insured portfolio, along with our broadly disciplined approach to risk management, expenses and capital optimization, will continue to drive our performance. With that, I'll turn it to Claudia for our closing remarks.

Thank you, Adam. We had a record quarter with continued momentum in terms of customer engagement, NIW volume and insured portfolio growth, credit risk innovation and bottom line financial performance. Our success in the quarter reflects our hard work over the past seven years, growing our franchise customer by customer and winning their trust and business loan by loan. It is rooted in the strength and dedication of our team, the consistency of our message and value proposition, our commitment to leading with credit risk management, our willingness to invest in differentiated technologies such as Rate GPS and our innovation in the capital markets. We are executing on our business plan and are well positioned to continue delivering strong results for our shareholders. With that, I'll ask the operator to come back on so we can take your questions.

[Operator Instructions] The first question comes from the line of Mark DeVries from Barclays. Your line is open.

Yes, thanks for all the commentary, Brad, around the QM patch. I was hoping to get just an update, if you guys have it on, where 43% plus DTI shook out this quarter as a percentage of new insurance written. And also just your thoughts on what the implications would be for you if they did just, you know, rip the patch off without doing any kind of changes to help fill the void.

Yes, Mark. We don't disclose 43 and over. We do 45 and over, and that was in Adam's remarks. That was 9% of our production this quarter. So you know, there's been a lot of confusion this week, but the CFPB has not killed the QM patch and they're focusing on revising the underlying ability to pay in QM mortgage rules on which the patch sits. So we think there's a low probability that they would actually just let it lapse and not replace it. So as a practical matter, if the patch were to expire without a suitable replacement, some qualified borrowers would find access to credit more expensive or limited and, even worse, more high DTI volume would likely flow to the FHA. Post crisis, we would observe there's been very little appetite in Washington for doing anything that restricts access for qualified borrowers or increases the burden on U.S. taxpayers. So we believe the CFP is going to arrive at a workable solution that balances access, sustainability and taxpayer protection. And we've been having active conversations in D.C. on a stand-alone basis and through USMI to help drive this outcome. This gets kind of technical, but if you go to the USMI website, there's published recommendations from our trade group about how to address this. And there's another aspect to this is that this is one area where there's broad agreement across multiple industry groups and interest groups, that this needs to be solved. So lenders, consumer advocacy groups and others are all aligned with us on this. So we feel good about that. But because of the fact that lenders currently work the loan files in order, to the point where they meet the DTI requirements and then they stop doing additional underwriting work such as finding additional sources of income. So it's very difficult to estimate the impact of work that isn't getting done because it's not required under the current rules. So, mark, very hard to give you a number there.

And then just a follow up for Adam. I appreciate the update on kind of your estimate of lifetime losses in a stress scenario after the latest ILN. Just curious how much that percentage might have benefited from being able to lower your attachment point from something closer to 2.5%. And if you are able to do future ILNs at that level or even lower, how far could we see that kind of expected lifetime loss ratio drop?

Mark, it's a good question. I wouldn't expect the lifetime loss ratio to dip far below 20%. One of the pieces that's happening, our ability to achieve lower credit enhancement levels directly ties to the quality of the risk that we are securing coverage on. So the risk that we're securing coverage on has a lower anticipated loss outcome, and so the attachment as a multiple of that anticipated loss outcome is much lower. The benefit that we achieved really in the quarter is a much lower deductible. Typically, it's akin to a deductible, right? Usually, when you have a deductible on your homeowner's policy or your car policy, the lower that deductible, the more it costs you. We got that lower deductible at dramatically tighter pricing. But I wouldn't expect the lifetime loss ratio to dip meaningfully below meaningfully below that 20% level.

Our next question comes from the line of Bose George from KBW. Your line is open.

First I just wanted to ask about the competitive landscape. You know, there were some concern in the market a couple of weeks ago based on a lender advertising discount and mortgage rate, so just any update on what you're seeing out there would be great.

Sure, Bose, it's Claudia. Yes, so we have seen from time to time a few lenders that engage in this kind of more direct approach. What I can say about us is our volumes is organic. It's driven by boots on the ground selling. Also, we're primarily getting our volume from Rate GPS. That's been our strategy all along. Our goal is to see all of our lenders utilize Rate GPS and let the lender's manufacturing process and the quality of the loans they originate determine the best price for their borrowers. And we also want to see all of our lenders have the same opportunity for the same rates on credit quality. It's important to us. We're taking an equal and balanced approach for all of our lender relationships and working hard to help each one of our customers succeed. And then supporting them with consistency. And that's proved to be really successful for us.

Bose, I'd just add. We think it was a bit of a red herring. Obviously it got picked up. It got a lot of attention. Anything that touches pricing on our sector tends to, this particular lender that was noted has been doing this for quite some time now. We haven't really seen a broad expansion of that behavior on the lender side, and so it's really nothing new. It was a headline that caught a lot of attention.

And then actually a couple of other little things. The earnings from cancellations, do you expect that level to stay kind of at that level next quarter as well just given the refi activity that's going on now?

Yes. You know, it's probably a worthwhile assumption to assume that the dollar volume of cancellation earnings will stay roughly consistent, maybe trending down modestly. I think over the long term we do expect that the dollar volume from cancellation earnings will generally rise. But the contribution to our yield in any given quarter will go down as those dollars are cast against a larger pool of [indiscernible] and net premiums earned. But as a dollar amount, you know, I'd say roughly in line to perhaps modestly down in Q3.

And then can you just update us on expectations for your expenses for the year?

Sure. In terms of how expenses looks through the remainder of the year, I think that our expense base grew in the second quarter compared to the first quarter primarily because of the significant ramp in our NIW. I'd expect that we'll see expenses running modestly ahead of the guidance that we provided earlier in the year, which was 10% growth versus adjusted expenses in 2018, given our expectations for continued strength in new business volume. And also one point to note the reduction of our seeding commission tied not just to the fact that we took our session rate on 2019 business down to 20%. That was a known item when we gave our guidance. But we also disclosed in our first quarter 10-Q, and there's some more detail that'll be in this quarter's 10-Q, that we recaptured a portion of the risk that we previously seeded under the 2016 quota share agreement. So increased volume is driving some additional expense load. We expect that, that will continue through the remainder of the year by a modest amount, as well as the fact that we'll get a slightly smaller offset from the seeding commission on the 2016 quota share treaty through year end.

So just slightly higher than the previous guidance, the 10%?

Yes, I'd say modestly higher.

Our next question comes from the line of Chris Gamaitoni of Compass Point. Your line is open.

Adam, what was the seeded premiums to the ILN in this quarter?

Sure, give me a moment. So with the two, it's just ILNs two and three that were reflected in the quarter. The total dollar amount was $2.9 million. It accounted for about 1.5 points of our net yield in terms of a decrease in net yield. We'll pick up obviously some additional dollars related to the recent ILN offering in the third quarter, but we'll also see, not fully offsetting that the partially offsetting that will be a reduction in the cost of the first two ILNs as they continue to amortize down as the underlying risk runs off right.

Right, perfect. And then however, if you can answer this, any sense of where new yields are coming on the portfolio? I think about it specifically for NMI, the prior books, a little bit older, had a higher singles concentration and you know you talked about that being a lower premium yield in the past. And I'm just thinking, with a higher refinance environment, there may be some benefit where that refinance actually comes on at a higher rate than the back book.

Yes, it'll look what I'd say is at least to the second quarter. So we're not providing explicit guidance on sort of new business rates, but I'll share that our pricing in the second quarter on new business was roughly the same on a risk-for-risk basis as it was in the first quarter. In fact, there were some buckets of risk where we modestly increased rates. But broadly speaking, the new business was coming on at rates that were generally consistent with what we achieved in the first quarter. And I think most importantly, right, ultimately for us, rate is one of the elements that drives our return, along with expenses, losses, right? Capital. And the rates that we achieved on new business in the second quarter and that we expect as we look out through the remainder of '19 and certainly and beyond, we believe, will allow us to continue to achieve that strong mid-teens return objective that we have.

Our next question comes from the line of Rick Shane from JPMorgan. The line is yours.

Adam, you've provided some comments on excess assets but indicated that post the ILN, that that number was higher. It's obviously not a surprise. I'm curious if you could narrow the range given the growth that we saw in terms of NIW during the quarter and the trajectory short of where you wound up post the ILN transaction.

Yes, so it's sort of, this one you can roughly add the two together. So we had a $96-million excess position at quarter end before giving considerations to the ILN. The ILN was $327 million. It's not a, that's the cash that's held in trust. It's the size of the notes offering. It's not a perfect map over to the PMIERs credit that we get, but it's a pretty good estimate. So it's basically that $96 million plus the $327 million of the offering gets you to kind of a rough estimate of pro forma PMIERs capacity.

And with that in mind, one of the things that you guys seem to be on a very good trajectory toward is ultimately being in a position to start returning capital. As we move into the second half of 2019, and I think more importantly as we move toward 2020, can you share sort of what the initial conversations are within the company related to capital returns and how long, in terms of the growth opportunity and the opportunity to offload risk with ILN, it might be before you get there?

Yes, Rick, it's a great question. I observe two things. One, you're right, that our third ILN offering combined with sort of all the capital that we already have, does provide us with a significant amount of runway. And we're organically generating capital at an accelerating pace every day, sort of point one. Point two, we think about that question all the time, right? We think about the best way to deploy our capital, and it's not just in broad terms, is it better to deploy it in support of the business or is it better to return it to shareholders in some form and what form, but we also think about when we're deploying it in the business, what's the pocket of the market where we're going to get the best risk-adjusted return? So that capital discussion and capital optimization discussion is one that we are having all the time. I'd say at the same time, in terms of the broad split, do we deploy it in support of the business or do we distribute to shareholders? Our customer franchise and the NIW opportunity that we have available to us are growing every day, right? Our $12.2 billion is up 86% on what we achieved in the second quarter of last year. And so right now, we believe that the best opportunity for us is to deploy that capital in support of new business growth. We're achieving 21% ROEs, and we think that that's really the best use of capital. I think longer term there will be a discussion that we have around when we're self sufficient, what's the best mix of that capital and the best use of our equity capital, whether it's to support shareholder distributions or reinvestment. But right now, we're not there yet.

Look, it's clear that it's a capital strategy, but it's also clear that it's a strategy to narrow standard deviation on returns over time.

That's right.

Our next question comes from the line of Mackenzie Aron from Zelman & Associates. Your line is open.

I think just a couple of quick ones. First, just Adam, how should we be thinking about the investment income and the yields given that cut in rates?

Yes. So look, investment income is going up because the portfolio is getting larger. This is the first quarter that we've pierced $1 billion in invested assets, which is a positive. New money rates have come down. We were probably seeing new money rates at about 3.5% toward the third quarter or so last year, and new money rates are now running about 3% to 3.1%. To the positive, we had a significant amount of capital just because of turnover in the portfolio with maturities, as well as the proceeds from the equity offering that we completed earlier last year. We had about a third of the portfolio that needed to be deployed last year. It's a much smaller number this year. So the portfolio yield itself was 3.2%. It should probably hold roughly there. There's just not that much that we're deploying into new investments in the immediate term. Over the long term, if new money rates hold at 3% and the yield is 3.2%, we'll obviously see some amount of convergence. But I wouldn't expect that to be a big driver certainly in 2019.

And then just going back to the ILN, can you just talk a little bit about the investor participation in the most recent deal. Are you seeing more interest or is pretty much the same group of counterparties that have been involved in prior transactions?

No, you know, because I think we're hardened by the fact that the investors that we're engaging with and those who choose to put in orders on the transaction seems to be growing with every deal. I think the fact that there are so many in the MI industry who are now out issuing in this asset class is helpful. It makes it difficult for investors to ignore. And also the fact that we've told investors, as well as both in the ILN market and our shareholders, that we expect to be a programmatic issuer in the ILN market. And being a programmatic issuer brings with it enhanced secondary market liquidity for our offerings. And that's helpful in terms of drawing new investors in. So being out with our third deal in three years solidifies that view that we are a programmatic issuer, which has been helpful.

Our next question comes from the line of Jack Micenko from SIG. Your line is open.

Wanted to get back to the NIW growth. I mean, 87% year over year looks like the other two MIs that are reported so far are sort of a mid-teens growth. And you know, the FICO, the LTV, it's all in the bands that you keep focusing on, which is the higher end. Where's the growth coming from? Is it more with existing accounts? Or is it more from new, because this is the strongest 2Q growth rate I think we've seen since maybe 2015 or '16. So just curious where it's coming from. And obviously, Claudia, you spoke about organic and doing more, but is it more with existing or is it new additions? I'm just curious.

Yes, yes. So thanks, we're really excited about what we've achieved. You know, we've always had this focus of adding new lenders and growing wallet share with our existing lenders, so I say we're going both. And we concentrate heavily on both. And we really have to keep on that goal. I think, at the end of the day, we've been at this for seven years. We've hired seasoned people and we've been discreet in the quality of our customers we've added. We've had a really focused strategy with Rate GPS, so all these drivers are really paying off. But I'd actually say it's both. We're really working on growing wallet share with our customers. And like we said, we've activated new customers and that gives us more opportunity and builds on all the activations in the past.

And then in the patch, and I think, Brad, you touched on this earlier as well, we hear over and over again, I think the underwriters, they stop when they get to the 40 or 43 or whatever it is and stop looking for more income. I'm wondering with your business, and I know there's some reunderwriting that you do, without certainty but can you speculate as to what percent of high DTI loans that's actually the case versus, say, the 43 is all we got? I don't know if I'm being clear enough but trying to figure out how many those are sort of underwritten through completion versus just stopping when the file is adequate.

Well, I'll start out. I tried to address this with the earlier question. Since the work stops now when they get to the 43, which is the current cutoff under the QM patch, additional work is not being done. Very hard to quantify exactly how many more loans would get under that kind of a standard if the additional work were done. We believe it could be a very substantial amount if people started looking at other ways of qualifying their borrowers, including bonus income, spouse's income, part time income, that kind of thing. So it could be very substantial. But you know, we're hopeful. And I referred to the U.S. MI proposal earlier. You might want to take a look at that. We have some suggestions in there about how they look at this with a new set of glasses, so to speak. And a proposal that if you want to take the DTI, the 45% to 50%, their suggestion for compensating factors that we think would make sense in terms of underwriting and insure yourself that you had successful borrowers, that would include down payments of at least 5%, cash reserves of at least three months, you know, strong credit history and good borrower credit history with similar monthly payment products. So I would encourage you to take a look at that, and we're very supportive of that proposal.

And, Jack, obviously, as Brad said, it's difficult to pin it down precisely, right, without getting access to a lot of information. I think we've seen some work that would indicate it's probably about 25% to 30% of the volume that's currently coming in under the patch, with the additional work to focus on spousal income, bonus income and the like, we'd be able to meet that 43% DTI threshold. So it's a significant amount of volume that we think would still otherwise be able to come to the market without any other change to the underlying rules or the QM patch itself. And obviously, on top of that, we do expect a change that will benefit the remaining 75% of that volume.

Our next question comes from the line of Phil Stefano from Deutsche Bank. Your line is open.

Yes, all my questions were answered. I just couldn't figure out how to unqueue. Thank you.

[Operator Instructions] Our next question comes from the line of Mark Hughes from SunTrust. The line is open.

I wonder if you could talk about the activity you've seen so far in July. I'm not sure if you've touched on that. And then your refi volume, how did that progress during the quarter? And has that been getting better here early in 3Q?

Yes, Mark, thanks. So we don't provide monthly updates on performance. I'd say though that if you trace back to my comments on expenses, that we do expect a modest increase beyond the guidance that I provided earlier in the year. And that's largely because of our expectations for continued strength in our new business production. We are optimistic as we look out through the remainder of the year that all of the traction and momentum that we've achieved will be sustainable. But in terms of specifics, it's not something that we provide. On the refi side, our contribution from refi volume or mix of refinancings increased from 8% in the first quarter to 12% in the second quarter. And that obviously ties directly to the refinancing environment or the interest rate environment. I also observed that we're in a really unique interest rate environment now where we've had such a dramatic drop in rates that hasn't been accompanied by a corresponding credit event, right? Usually, there's a significant credit event that shocks the macroeconomic environment, and there's then a resulting pattern of economic easing. And that hasn't come through. So we're seeing a significant spike in refinancing volume, which is a positive, right? It's 12% versus 8%, 50% increase in the concentration this quarter without a corresponding amount of corresponding amount of anything on the credit side. The other piece is, usually, refinancing activity has a lower penetration rate in our market because by the time somebody's up for a refinancing, they've naturally built equity through home price appreciation and just the natural amortization of their principal balance. But given how quickly rates have come down, we think a larger chunk of those borrowers, particularly those who took out their loan six months, nine months ago, will still need MI support than in an otherwise normalized refi environment. So we're expecting broadly for the market that the penetration of MI in refinancing origination volume will trend up to a degree.

There are no further questions at this time. I'll now turn the call back to the management.

So thank you for joining us on the call today. We will be participating in the Susquehanna Conference in New York on August 6, and we look forward to seeing you there. Thank you.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. And have a wonderful day. You may all disconnect.