NMI Holdings Inc

NASDAQ:NMIH

Earnings Call Analysis

National MI Delivers Strong Quarter with Record Results

In the third quarter, National MI established standout growth, a record high-quality insurance portfolio worth $194.8 billion, and solid macroeconomic resilience. The company generated $11.3 billion worth of new insurance-written (NIW) volume and recorded $148.2 million in revenue, achieving an impressive $84 million GAAP net income with a 19% return on equity. Share repurchases amounted to $19.2 million, buying back around 675,000 shares. Trends in persistency are higher than historical levels, hinting at a sustainable business despite a challenging macro environment. The investment portfolio experienced increased yields, with new investments striking a favorable rate compared to the overall yield.

National MI Experiences Record Growth and Operational Excellence

National MI has convincingly exhibited a standout operational performance and considerable growth in its insured portfolio, with the third quarter painting a picture of a company on a strong upward trajectory. Their value in the housing market seems to be escalating, with a recorded $194.8 billion in high-quality insurance in force—an increase of 9% from the past year. This expansion is shadowed by their constructive interactions with policymakers, aiming to enhance market access and affordability.

Impressive Financial Milestones Led by High Net Income and Return on Equity

Financial success for National MI comes with record earnings, with GAAP net income hitting a new high at $84 million, translating to $1 per diluted share. The impressive figures mark a 12-month growth of 12% and 5% increase over the preceding quarter. The strength of these results is bolstered further by a robust return on equity at 19%.

Share Repurchases Indicative of Strong Capital Position

Reflecting confidence in its financial health, National MI's strategy included repurchasing $19.2 million of its shares, which equates to approximately 675,000 shares in Q3. This action underscores the company's interest in incrementing shareholder value and managing capital sustainably.

Prudent Management of Expenses and Efficiency

National MI has commendably managed its expense ratio, maintaining it at 21.3%. Their operational expenditure falls within their long-term target range, indicative of a disciplined approach that optimizes efficiency and bodes well for future financial control.

Prepared for Uncertainties in Market Conditions

Despite an overall resilient housing market, the company remains alert to elevated risks within the economic landscape, signaling a preparedness to adapt to external risk factors that have shown an uptick in recent months.

Sustainable New Business Environment Despite Economic Slowdown

National MI reiterates that the present market still harnesses an attractive new business opportunity, resembling the pre-pandemic level of 2019, and anticipates greater potential in the coming year, projecting a $1.4 trillion to $1.5 trillion purchase market.

Credit Performance Influenced by Unemployment and House Price Paths

Default incidents are largely tied to unemployment, while both the frequency and the severity of such events hinge on house price paths, indicating the company's vigilant attention to macroeconomic indicators when managing risks.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, and welcome to the NMI Holdings Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. John Swenson. Please go ahead.

[John Swenson, executive]

Thank you, operator. Good afternoon, and welcome to the 2023 Third Quarter Conference Call for National MI. I'm John Swenson, Vice President of Investor Relations and Treasury. Joining us on the call today are Brad Shuster, Executive Chairman; Adam Pollitzer, President and Chief Executive Officer; Ravi Mallela, Chief Financial Officer; and Nick Rilmuto, our Controller. Financial results for the quarter were released after the close today. The press release may be accessed on NMI's website located at nationalmi.com under the Investors path. .

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 one 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 may 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.

[Bradley Shuster, executive]

Thank you, John, and good afternoon, everyone. I'm pleased to report that in the third quarter, National MI again delivered standout operating performance, continued growth in our insured portfolio and record financial results. Our lenders and their borrowers continue to turn to us for critical down payment support. And in the third quarter, we generated $11.3 billion of NIW volume, ending the period with a record $194.8 billion of high-quality, high-performing insurance in force. While the macro risk environment continues to evolve, we remain greatly encouraged by the resiliency of the housing market, the exceptional performance of our high-quality insured portfolio and the broader success we're achieving across our business. .

In Washington, our conversations remain active and constructive. Policymakers, regulators, the FHFA and the [indiscernible] remain highly focused on promoting broader access and affordability to the housing market. And we believe there is broad recognition of the unique and valuable role that the private mortgage insurance industry plays in this regard. At National MI, we recognize the need to provide all borrowers with a fair and equitable opportunity to access the housing market, establish a community identity and build long-term wealth through homeownership. Our products and the support we provide are more important today than ever before and we see an increasing opportunity to support borrowers at a time when they need us most. Overall, we had a terrific third quarter and are well positioned to continue to lead with impact and drive value for our people, our customers and their borrowers and our shareholders going forward. With that, let me turn it over to Adam.

[Adam Pollitzer, executive]

Thank you, Brad, and good afternoon, everyone. National MI continued to outperform in the third quarter, delivering significant new business production, strong growth in our insured portfolio and record financial results. We generated $11.3 billion of NIW volume and ended the period with a record $194.8 billion of high-quality, high-performing insurance in force. Total revenue in the third quarter was a record $148.2 million, and we delivered record GAAP net income of $84 million or $1 per diluted share and a 19% return on equity. .

Overall, we had an exceptionally strong quarter and are confident as we look ahead. The macro environment and housing market in particular, have remained resilient in the face of increasing interest rates. We see a sustained new business opportunity with our lender customers and their borrowers continuing to rely on us in size for critical down payment support. We have an exceptionally high-quality insured portfolio and our credit performance continues to stand ahead. Our persistency remains well above historical trends and when paired with our current NIW volume has helped to drive continued growth and embedded value gains in our insured book. We've led with innovation in the risk transfer markets and have secured comprehensive reinsurance coverage on nearly all of the policies we've ever originated. And we continue to manage our expenses and capital position with discipline and efficiency, building a robust balance sheet that is supported by the significant earnings power of our platform.

Notwithstanding these strong positives, however, macro risks do remain, and we have maintained a proactive stance with respect to our pricing, risk selection and reinsurance decisioning. It's an approach that has served us well and continues to be the prudent and appropriate course. More broadly, we've been encouraged by the continued discipline that we've seen across the private MI market. Underwriting standards remain rigorous, and the pricing environment remains balanced and constructive. Overall, we had a terrific quarter, delivering strong operating performance continued growth in our insured portfolio and record financial results.

Looking ahead, we're well positioned to continue to serve our customers and their borrowers, invest in our employees and their success, drive growth in our high-quality insured portfolio and deliver through the cycle growth, returns and value for our shareholders. With that, I'll turn it over to Ravi.

[Ravi Mallela, executive]

Thank you, Adam. We delivered record financial results in the third quarter with significant new business production, strong growth in our high-quality insured portfolio, record top line performance, favorable credit experience, continued expense efficiency and record bottom line profitability.

Total revenue in the second quarter was a record $148.2 million. GAAP net income was a record $84 million or $1 per diluted share, and our return on equity was 19%. We generated $11.3 billion of NIW and our insurance in force grew to $194.8 billion, up 2% from the end of the second quarter and 9% compared to the second quarter of 2022. The 12-month persistency was 86.2% in the third quarter compared to 86% in the second quarter. Persistency continues to serve as an important driver of the growth and embedded value of our insured portfolio.

Net premiums earned in the third quarter were a record $130.1 million, compared to $126 million in the second quarter. We earned $864,000 from the cancellation of single premium policies in the third quarter compared to $1.1 million in the second quarter. Net yield for the quarter was 27 basis points, up from 26.7 basis points in the second quarter. Core yield, which excludes the cost of our reinsurance coverage and the contribution from cancellation earnings was 33.9 basis points, up from 33.8 basis points in the second quarter.

Investment income was $17.9 million in the third quarter compared to $16.5 million in the second quarter. Total revenue was a record $148.2 million in the third quarter, up 4% compared to the second quarter and 13% compared to the third quarter of 2022. Underwriting and operating expenses were $27.7 million in the third quarter, compared to $27.4 million in the second quarter.

Our expense ratio was 21.3% compared to 21.8% in the second quarter. We had 4,594 defaults as of September 30 compared to 4,349 as of June 30, and our default rate was 74 basis points at quarter end. Claims expense in the third quarter was $4.8 million compared to $2.9 million in the second quarter. We have a uniquely high-quality insured portfolio and our claims experience continues to benefit from the discipline with which we have shaped our book and the strong position of our existing borrowers as well as the broad resiliency we're seeing in the housing market.

Interest expense in the quarter was $8.1 million. Net income was a record $84 million or $1 per diluted share, up 5% compared to $0.95 per diluted share in the second quarter and 12% compared to $0.90 per diluted share in the third quarter of 2022. Total cash and investments were $2.4 billion at quarter end, including $134 million of cash and investments at the holding company.

Shareholders' equity as of September 30 was $1.8 billion, and book value per share was $21.94. The Book value per share, excluding the impact of net unrealized gains and losses in the investment portfolio was $24.56, up 4% compared to the second quarter and 18% compared to the third quarter of last year. In the third quarter, we repurchased $19.2 million of common stock, retiring 675,000 shares at an average price of $28.51. As of September 30, we had $208 million of repurchase capacity remaining under our existing program.

At quarter end, we reported total available assets under PMIERs of $2.6 billion and risk-based required assets of $1.4 billion. Excess available assets were $1.2 billion. In summary, we delivered standout financial results during the third quarter with continued growth in our high-quality insured portfolio, record top line performance, favorable credit experience and continued expense efficiency driving record bottom line profitability and strong returns. With that, let me turn it back to Adam.

[Adam Pollitzer, executive]

Thank you, Ravi. Overall, we had a terrific quarter, once again delivering significant new business production, continued growth in our high-quality insured portfolio and record financial performance. Looking forward, while the macro environment continues to evolve, we are encouraged by the tremendous resiliency that we've seen in the economy and housing market thus far and are confident that the disciplined approach we've taken to managing our business from day 1 will continue to drive our performance. We have a strong customer franchise, a talented team driving us forward every day, an exceptionally high-quality book covered by a comprehensive set of risk transfer solutions and a robust balance sheet supported by the significant earnings power of our platform. Taken together, we are well positioned to continue delivering differentiated growth, returns and value for our shareholders. Thank you for joining us today. I'll now ask the operator to come back on so we can take your questions. .

[Operator]

[Operator Instructions] Your first question comes from Rick Shane with JPMorgan.

[Richard Shane, analyst]

I hope everybody is well. Just wanted to talk a little bit about the expense ratio. Again, tick down and '23 will be a step forward versus '22. At what point do you sort of asymptotically approach the threshold where you don't continue to build operating leverage? And what level would you see that sort of -- what ratio would you see that [indiscernible].

[Adam Pollitzer, executive]

Yes, Rick, it's nice to hear from you. I'll start and then let Ravi answer with specifics about expense ratio in the quarter and where it might trend, but I want to offer a broader perspective on our operating expenses and how we think about it really as a strategic matter. Broadly speaking, we have always been focused on managing our business with discipline and efficiency. And candidly, we believe that we have a sustained expense advantage with the lowest absolute dollars of operating expense in the MI sector by a wide margin. In terms of the benefits that we always talk about that you'll recognize, the financial impact is an obvious one, right? Lower expenses allow us to generate consistently stronger returns naturally. But there's also a real strategic aspect, real strategic value that's often overlooked and it feeds directly into our risk management approach and the flexibility that we have to more actively shape the profile of our high-quality insured portfolio. .

As a financial matter, we write business and price our policies to generate an adequate return on capital, right? We need premium revenue coming in to absorb our operating expenses, our loss costs, our funding needs and taxes. And with our expense advantage, we simply don't need to have a higher concentration of higher risk, higher-yielding business coming in to cover our operating base. And so we can and have been achieving best-in-class returns while also taking the most proactive and disciplined approach to managing our mix of business and a large part of that flexibility and our ability to deliver consistently strong returns while being the most discerning from a risk standpoint, actually traces a lot to the discipline that we continue to carry on the operating expense side. So I'll let Ravi answer the specifics about operating expense, but we really think about expense advantage as a core strategic advantage for us, not just the numbers and a model expense ratio.

[Ravi Mallela, executive]

And Adam, I would just add that where that strength comes from and that advantage comes from just us having the smallest head count by a wide margin. And we also benefit from a de novo IT platform that's scalable, efficient and flexible. And a lot of that benefit came through again in Q3 with our 21.3% expense ratio. And really, we've talked about this in the past, Rick, we do expect our dollars of OpEx to grow because we continue to invest in people, technology, risk management and in growth. But we're really happy about the way our expense profile in particular, has performed over time, and our expense ratio is really what we're focused on. Now OpEx, we think we're going to continue to be in our long-term range of mid- to low 20s, and we're delighted to achieve that in Q3, and we're certainly optimistic about managing in a disciplined manner and driving efficiency for the future.

[Adam Pollitzer, executive]

Yes. Look, rate of improvement is obviously going to slow from such a low base. We've got the lowest expense ratio broadly, the lowest dollars of expense absolutely in the industry. So we'll see where that trend is going forward. But right now, we're in a really good position with the efficiency we carry.

[Richard Shane, analyst]

No. I appreciate the comments on the strategic benefit or advantage it creates as well. I mean at the end of the day, I probably am a little more numbers in the model guy and focused on that, but it's an important observation as well. Thank you.

[Operator]

Next question comes from Bose George with KBW.

[Bose George, analyst]

It looks like your provision for new notices has trended down, especially compared to 1Q where it was up pretty meaningfully. Is that accurate? And can you just discuss drivers for reserving for new notices and how that's kind of changed over the past year?

[Ravi Mallela, executive]

So Bose, nice to hear from you. Certainly new defaults. What I would say, generally, they've had the same attributes as they have in recent quarters. What I would highlight to you is that we've been in a rising home price environment. We've essentially had 3 additional months to model into our reserving process. And I would just say, broadly speaking, we tend to anchor to downside scenarios. And that really does come into our Q3 position. But we've moderated the expectation for strain, just given the broad resiliency in the macro environment, and frankly, how house prices have been performing so far. And so you see that change sort of quarter-over-quarter driven by those aspects.

[Bose George, analyst]

Okay. It definitely makes sense. And then actually, you have a statistic, the quarterly runoff -- and I was just curious how that ties in with the annual persistency because that number has kind of ticked up over the last couple of quarters. Is that just a quarterly persistency or just yes, can you just discuss that?

[Adam Pollitzer, executive]

Yes, that's exactly right. So as our 12-month persistency number that we look at. It simply measures the business that was on our books 12 months earlier. What percentage of that remains as of September 30. The quarterly runoff technically run off is the inverse of persistency. But what that's looking at is the rate of runoff of the business that was on our books as of June 30 of this year, how much has run off by the time we get to September 30.

[Bose George, analyst]

Okay. So if I annualize that, does it suggest that the runoff, the persistency is kind of better at a quarterly pace versus what we see on the annual number? Or is that not sort of doable?

[Adam Pollitzer, executive]

No, it's going to be the inverse, right? So rate of runoff is the inverse of persistency. That which leaves us isn't obviously staying on our books, but we've talked for a while that our persistency in terms of the trend going forward. Right now, our persistency is well above historical trends. We expect that, that will remain the case, but we're probably getting to upper bounds as to where it will sit and may see some migration, whether it's a touch up a touch down as we roll forward.

[Operator]

Next question comes from [indiscernible] with Truist Securities.

[Unknown Analyst]

I'm calling in for Mark Hughes. I'm sorry if I missed it, but were there any share buybacks this quarter?

[Ravi Mallela, executive]

Yes, there were. In Q3, we bought back $19.2 million of shares, approximately 675,000 shares in Q3.

[Unknown Analyst]

And the question was asked last quarter figure, it would be helpful to give you an updated view on what concerns NMI the most right now in the current environment with, as you mentioned, rising prices and still low default rates?

[Adam Pollitzer, executive]

Yes.ellook, I'd say it's our job as risk managers to look for concerns around every corner, and we certainly do that. So we stress ourselves around a whole variety of matters. We look internally, right? Are there things around how we're structured, what we're focused on, what we're doing that should give us cost for concern. Thankfully, there aren't. We're performing at an exceptionally high level and delivering real core operating strength across our portfolio, across our people, our culture, our expense base, our IT platform. So everything that it takes for us to manage the business internally. And so then we look externally. And we spent some time talking for a while now that we're in an environment where even though we've seen tremendous resiliency in the economy broadly and the housing market in particular, we still think that risk is elevated to a degree, right? We're not at the back end of whatever we're in right now. And candidly, over the last several months, we've seen, let's say, the volume in terms of external risk factors perhaps turn up a bit, right?

We have significant incremental geopolitical instability. We have this sector the U.S. government shut down a few weeks forward. We still have long rates that are increasing with uncertainty as to what that will ultimately mean for the economy. And so when we're focused on risk right now, the items that we're most focused on that we're most concerned about, naturally are those that will touch borrower performance and consumer performance it's the macro, it's house price paths. It's where unemployment might go in response to all of these environmental factors that surround us.

[Operator]

Your next question comes from Eric Hagen with BTIG.

[Eric Hagen, analyst]

Can you maybe elaborate on what you're seeing with respect to what I think I heard you say is a balanced and constructive pricing market. And are you maybe surprised that it's not more competitive or being characterized that way, just given how slow new origination activity is in the market.

[Adam Pollitzer, executive]

No. It's -- again, it's a very good question. And let me touch then both on the origination environment itself as well as on the pricing environment. I'll start with pricing. But broadly speaking, we continue to be really encouraged by the discipline that we see across the market. And what I say is a really deliberate approach that the industry is taking. We've noted for a while now that rates have hardened and what we call laddered hire in view of emerging macro risks over the last year or so and we were able to achieve incremental pricing where we believed it was both necessary and appropriate. Today, where we should be, right? We're at a point where pricing is meaningfully higher than it was in mid-2022. And and it's holding in a constructive way. And from our vantage point, we're still focused every day on ensuring that we strike the right balance to fully and fairly support our customers and their borrowers but also recognize that macro risk from a forward look standpoint is still elevated, and we need to account for that through price and also for us, importantly through risk selection. And so we're not surprised at all.

We think that the heavy investment in the sector and the deployment of risk-based pricing tools lends itself to great value in an environment where the potential for risk is still more elevated. You touched on a question around origination volume. And obviously, look, we're not where we were at peak points during the pandemic with record years in 2020, 2021 and even a bit more in 2022. But it is still a very constructive environment, new business environment from an MI standpoint. Right? Ours is primarily a purchase-driven product. And to give you a sense, the purchase origination market this year is expected to come in at about $1.3 trillion, which is exactly the same size as in 2019. 2019 was a very constructive MIU business environment. And as we look forward to next year, general forecast contemplate around $1.4 trillion to $1.5 trillion purchase market, up from 2023, up from a pre-pandemic normalized level in 2019. And so yes, the headlines are obviously about a slowing level of activity on the origination side. We're seeing that stress emerge through the originators themselves, but ours as a primarily purchase-focused market, the new business opportunity is sustained at an attractive point.

[Eric Hagen, analyst]

Yes. That's really helpful. So is there a scenario where delinquencies could pick up at some point? I recognize that they're very low and stable to begin with. But is there a scenario where delinquencies could pick up with the severity rate that's applied to those delinquencies stays stable or even comes down? Or is it rational to assume that they kind of move together, if you will.

[Adam Pollitzer, executive]

So it's a good question. I'd say the expectations for both frequency and severity. So once -- what we tend to see happen is that the incidence of default is tied most directly to unemployment. When borrowers [indiscernible], they've lost their jobs and importantly, they can't find reemployment opportunities very quickly, that's when we might see defaults increase, the number of defaults. The actual reserve that we established against those defaults were the severity assumption but also the frequency assumption comes into play, right? So severity being if this default progresses to a claim payment, which is ultimately a foreclosure or some other means to which the borrower is being removed from their home and were presented with a claim. How much do we owe and frequency is, well, what's the likelihood that, that progression itself will happen.

The incidence of default tied to primarily to unemployment. Both frequency and severity are more heavily influenced by house price paths. And so generally speaking, we would assume that there's going to be a reasonably close relationship between house price path and unemployment levels because obviously, in a supply-demand-driven environment, demand is tied to gainful employment by many prospective borrowers. But that's not always the case. If we saw an increase in default activity, but we didn't see a corresponding stream come through the housing market in terms of house price paths we wouldn't necessarily see, I'll call it, a one-to-one relationship where you have an increase in default that's carried with a fundamental shift in the reserving assumptions.

[Ravi Mallela, executive]

Right. And Adam, I think you've mentioned this in the past that it's important to recognize that we don't apply sort of blanket assumptions to our reserving process. And so we do a loan level analysis every quarter and these are macro-driven models that allow us to come to a conclusion about our reserving process based on the individual profile of each of our defaulted borrowers.

[Operator]

Your next question comes from Daniel [indiscernible] with Bank of America.

[Unknown Analyst]

Your average portfolio yields continue to increase at a pretty nice clip. Can you just talk about like the dynamic between the yield on new investments versus the overall portfolio yield?

[Ravi Mallela, executive]

So we've seen yields inflect higher over the last few quarters. And -- and so from that perspective, it's generally -- it's been generally stable, and it's had a favorable trend in Q3. And what we're seeing with respect to net yield is -- it's been 27 basis points, and our core year yield was 33.9 basis points where both were up modestly. And I think we're benefiting from both the continued increases in persistency and the rate actions we've taken and those cumulative gains we've achieved in new business pricing over the last year plus. And it's balanced somewhat by the high-quality production that we generate and sometimes and that naturally comes in at sort of a different rate profile.

[Adam Pollitzer, executive]

Also just to round it out. So we think about yield and the headline word yield across both the premium yield on the in-force portfolio and what it allows us to generate from a premium revenue standpoint. We've certainly been inflecting higher there for several quarters now, which is terrific. We also talk about yield in an increasingly focused way in terms of the investment portfolio. And from an investment portfolio standpoint, we're seeing the same dynamic. The pretax book yield on our portfolio was 2.8% and it continues to move higher as lower yielding maturities run off, and we're investing at meaningfully higher new money rates to give you a spread for that delta that you're focused on, we're currently seeing new money opportunities at a blended average rate of around 5.5% compared to the 2.8% book yield on the portfolio. .

[Unknown Analyst]

That's great detail. And then you mentioned earlier, you have like a lot of active [indiscernible] policymakers. I was just curious if you see any like regulatory developments that could materially change the business or like the industry or things relatively quiet at the moment.

[Bradley Shuster, executive]

Yes. It's Brad. So as we said, we do have active dialogue with FHFA and [indiscernible]. We always have and we value the consistency and transparency of that engagement. As you can imagine, there are a range of items that we discussed. Our most recent conversations surround access, affordability and fairness and those remain points of focus among a broad range of other issues, but nothing really critical pending right at the moment.

[Operator]

Your next question comes from Geoffrey Dunn with Dowling.

[Geoffrey Dunn, analyst]

Adam, I wanted to ask you about vintage seasoning and specifically, there's going to come a time where the '22, '23 books, higher loan vintages, higher interest rates, they stick to season out and take more effect of the earnings profile and credit results, but I'm curious, as you look at the '19 through '21 vintages, are those developing along the same curves? Or is the unique low interest rate profile, maybe elongating those curves and is there any potential for that maybe softening when the '22 and '23 hit a couple of years out from now?

[Adam Pollitzer, executive]

Yes. Jeff, it's a good question. And look, obviously, we spent a lot of time talking about how our existing borrowers, broadly speaking, are so well situated to manage through both good times and also to the extent that a stress environment emerges because they have significant embedded equity in their homes. Because we're in an environment today with high employment, very low unemployment, they're all gainfully employed. And because they are locked in with record low 30-year fixed rate notes that provide them with a manageable debt service obligation. Obviously, as we look forward, as we sort of progress the production stream from '22 and through '23, we're seeing more and more borrowers in the portfolio that had equally strong credit characteristics as those who came into the portfolio in earlier periods, but they're carrying higher note rates. .

And so what does that mean, right? What does that mean for portfolio performance going forward. I think one critical piece is that they are -- we're still seeing the same rigor, the same rigor from an underwriting standpoint that's applied on the origination side. That hasn't shifted. These are borrowers that are fully vetted that are tested where their ability to pay and support their mortgages is evaluated and there's an affirmative decision made upfront. So that's a positive. Even though the rate itself is higher, these are borrowers who've obviously been underwritten, assuming that rate will carry forward, and we're comfortable with the debt obligations that they have.

As we look forward, the bigger driver of credit performance that we see that may shift the experience we see for the '22 and '23 production years compared to, say, 2019 through 2021 and it's really the house price path, right? The borrowers who are in their homes and in their loans for several years now, benefited from an extraordinary house price appreciation environment through the course of the pandemic that we may not see again ever or certainly for some time. And so the appreciated equity positions of the borrowers who begin to face stress just as a natural seasoning of the portfolio happens from the '22 and '23 book years will be different in its implication than what we see now and we've seen for the 2019 through 2021 borrowers. But that's not necessarily related to the note rate. It's really just about the house price path going forward. At the end of the day borrow with [indiscernible], whether they get there with an 8% mortgage or a 3% mortgage still has a 35 BTI, a borrower with a 45 DTI, whether it's an 8% or 3% note rate, it's still the same calculation in terms of their, call it, their debt service coverage.

[Geoffrey Dunn, analyst]

Okay. And then as you think about the assumptions you're making for your incremental reserving for particularly the assumption on home prices. How negative can you anchor given the tightness of the housing supply.

[Adam Pollitzer, executive]

Look, how negative can we anchor to, we have a responsibility to use -- to establish a best estimate. But for reserving purposes, we talked for some time that we always aim to take an appropriate but also an appropriately conservative view. And so in practice, what that generally means is that we do anchor more to our downside scenarios when setting our reserve position. We naturally have to balance that by what we're actually seeing today. What we see today has to inform at all times our view of what's going to happen tomorrow. And so as Robbie mentioned, at September 30, we did moderate our expectations for economic strain and house price declines that are embedded in our reserve position. But we also are still embedding a stress bias in our analysis. .

[Operator]

This concludes our question and answer session. I'll now hand back for closing remarks.

[Adam Pollitzer, executive]

Well, thank you again for joining us. We'll be hosting our annual Investor Day on Thursday, November 16, in New York and will be participating in the Goldman Sachs Financial Services Conference on December 5. We look forward to speaking with you again soon.

[Operator]

This conference has now concluded. Thank you for participating. You may now disconnect.