NMI - Q3 2023

Transcript

Operator (participant)

Good day, and welcome to the NMI Holdings third quarter 2023 earnings conference call. After today's presentation, there'll be opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. 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 (VP of Investor Relations and Treasury)

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 Relmuto, 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 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 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.

Brad Shuster (Executive Chairman)

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 continued 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 GSEs remain highly focused on promoting broader access and affordability to the housing market.

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 (President and CEO)

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 (EVP and CFO)

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. 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 30th, compared to 4,349 as of June 30th, 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 30th was $1.8 billion, and book value per share was $21.94.

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 30th, 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 (President and CEO)

Thank you, Ravi. Overall, we had a terrific quarter. Once again, delivering significant new business production, continued growth in our high quality and short 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 one 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 (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw, please press star then two. Your first question comes from Rick Shane with JPMorgan. Please go ahead.

Rick Shane (Managing Director and Senior Equity Research Analyst)

Thanks, guys, for taking my question, and I hope everybody's well. Just want to talk a little bit about the expense ratio, again, ticked down, and 2023 will be a step forward versus 2022. 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- you know, what ratio would you see that being?

Adam Pollitzer (President and CEO)

Yeah, 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.

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, 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 in a model expense ratio.

Ravi Mallela (EVP and CFO)

Right. And Adam, I would just add that, you know, where that strength comes from and that advantage comes from just us having the smallest headcount 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, you know, came through again in Q3 with our 21.3% expense ratio. And really, you know, we've talked about this in the past, Rick, you know, we do expect our dollars of OpEx to grow because we continue to invest in people, technology, risk management, and in growth. But, you know, we're really happy about the way our expense profile, in particular, has performed over time, and our expense ratio, you know, is really what we're focused on.

Now, OpEx, you know, you know, we think we're going to continue to, you know, be in our long-term, long-term range of mid- to low 20s, and we're delighted to achieve that in Q3. We're certainly optimistic about managing in a disciplined manner and driving efficiency for the future.

Adam Pollitzer (President and CEO)

Yeah, but 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.

Rick Shane (Managing Director and Senior Equity Research 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 (participant)

Your next question comes from Bose George, with KBW. Please go ahead.

Bose George (Managing Director)

Yeah, good afternoon. It looks like your provision for new notices has trended down, especially compared to 1Q, where, you know, it was up pretty meaningfully. I mean, 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?

Adam Pollitzer (President and CEO)

So, you know, Bose, nice to hear from you. Certainly new defaults, you know, what I would say generally, they've had the same attributes as they have in recent quarters. You know, what I would highlight to you is that, right, we've been in a rising home price environment. We've essentially had three additional months to model into our reserving process. And, you know, I would just say, broadly speaking, you know, we tend to anchor to downside scenarios, and that really does, you know, 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 (Managing Director)

Oh, okay. That definitely makes sense. Thanks. And then actually, you have a statistic, a quarterly runoff. And I was just curious how that ties in with the annual persistency, because that number has kind of ticked up, you know, over the last couple of quarters. Yeah, is that just a quarterly persistency or just, yeah, can you just discuss that?

Adam Pollitzer (President and CEO)

Yeah, it is. That's exactly right. So those are 12-month persistency numbers 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 30th? The quarterly runoff, technically, runoff is the inverse of persistency, but what that's looking at is the rate of runoff for the business that was on our books as of June 30th of this year, how much has run off by the time we get to September 30th?

Bose George (Managing Director)

Okay, so if I annualize that, does it suggest that the, the runoff, the persistency is kind of better at that, at a quarterly pace versus what's, you know, what's, what we see on the annual number, or, or, or is that not sort of doable?

Adam Pollitzer (President and CEO)

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.

Bose George (Managing Director)

Okay, great. Thanks.

Operator (participant)

Your next question comes from Maxwell Fritscher with Truist Securities. Please go ahead.

Maxwell Fritscher (Equity Research Associate)

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

Adam Pollitzer (President and CEO)

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

Maxwell Fritscher (Equity Research Associate)

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

Adam Pollitzer (President and CEO)

Yeah, well, look, I, 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 cause 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've 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, 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 the specter of a U.S. government shutdown a few weeks forward. We still have long rates that are increasing with uncertainty as to what that will ultimately mean for the economy.

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.

Maxwell Fritscher (Equity Research Associate)

That's helpful. Thank you.

Operator (participant)

The next question comes from Eric Hagen with BTIG. Please go ahead.

Eric Hagen (Managing Director)

Hey, thanks. Hope we're doing well. Hey, can you maybe elaborate on what you're seeing with respect to, you know what I think I heard you say, a balanced and constructive pricing market. Are you maybe surprised that it's not more competitive or, you know, being characterized that way, just given how slow, you know, new origination activity is in the market?

Adam Pollitzer (President and CEO)

No, it's a, 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. Look, broadly speaking, we continue to be really encouraged by the discipline that we see across the market, and what I'd say is a really deliberate approach that the industry is taking. We've noted for a while now that rates had hardened and what we call laddered higher 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, we're where we should be, right? We're at a point where pricing is meaningfully higher than it was in mid-2022, and it's holding in a constructive way.

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, you know, a question around origination volume, and obviously, look, we're not where we were at, 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, you know, 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 MI new business environment. And as we look forward to next year, general forecasts contemplate around a $1.4 trillion-$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 (Managing Director)

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

Adam Pollitzer (President and CEO)

Yeah. So it's a good question. I'd say the expectations for both frequency and severity. So what we tend to see happen is that the incidence of default is tied most directly to unemployment. When borrowers face stress because 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 establish against those defaults, where 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 through which a borrower has been removed from their home and we're 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 ties 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, 'cause 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 strain 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 defaults that's paired with a fundamental shift in the reserving assumptions.

Eric Hagen (Managing Director)

Right.

Ravi Mallela (EVP and CFO)

And Adam, I think you've mentioned this in the past, that, you know, 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 a reserving process based on the individual profile of each of our defaulted borrowers.

Eric Hagen (Managing Director)

Right. Hey, that's really helpful. Thank you, guys, very much.

Operator (participant)

The next question comes from Daniel Rich with Bank of America. Please go ahead.

Daniel Rich (Equity Research Analyst)

Hi, good afternoon. Your average portfolio yields continued to increase at a pretty nice clip. Can you talk about, like, the dynamic between the yield on new investments versus the overall portfolio yield?

Ravi Mallela (EVP and CFO)

So we've seen yield, you know, inflect higher over the last few quarters. And so, you know, from that perspective, it's generally—it's been generally stable, and it's had a favorable trend in Q3. And, you know, 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 (President and CEO)

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 pre-tax 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.

Daniel Rich (Equity Research Analyst)

That's great detail. Thank you. And then you mentioned earlier, you have, like, a lot of active and constructive conversations with policymakers. I was just curious if you're seeing any, like, regulatory developments that could materially change the business or, like, the industry, or are things relatively quiet at the moment?

Brad Shuster (Executive Chairman)

Yeah. Hi, it's Brad. So as we said, we do have active dialogue with the FHFA and the GSEs. 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 discuss. 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.

Daniel Rich (Equity Research Analyst)

Okay. That's all for me. Thank you.

Brad Shuster (Executive Chairman)

Sure.

Operator (participant)

Once again, if you wish to ask a question, please press star then one. Your next question comes from Geoffrey Dunn with Dowling. Please go ahead.

Geoffrey Dunn (Partner and Equity Analyst)

Thanks. Good afternoon. Adam, I wanted to ask you about vintage seasoning, and specifically, there's gonna come a time where the 2022, 2023 books, higher loan vintages, higher interest rates, they start to season out and take more effect of the earnings profile and credit results. But I'm curious, as you look at the 2019 through 2021 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 may be softening when the 2022 and 2023 hit a couple of years out from now?

Adam Pollitzer (President and CEO)

Yeah, Geoff, it's a good question. You know, and look, obviously, we've 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're locked in with record low 30-year fixed rate notes that provide them with a manageable debt service obligation. Obviously, as we look forward, you know, as we sort of progress the production stream from 2022 and through 2023, we're seeing more and more borrowers in the portfolio that have 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, you know, 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 2022 and 2023 production years compared to, say, 2019 through 2021, 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 2022 and 2023 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.

Geoffrey Dunn (Partner and Equity Analyst)

Okay, and then-

Adam Pollitzer (President and CEO)

At the end of the day, a borrower with a 35 DTI, whether they get there with an 8% mortgage or a 3% mortgage, still has a 35 DTI. 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 (Partner and Equity Analyst)

Okay. And then as you think about how 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 money of the housing supply?

Adam Pollitzer (President and CEO)

Look, how, how negative can we anchor? I think we have a responsibility to use to establish a best estimate. But for reserving purposes, we've 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, 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 Ravi mentioned, at September 30th, 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.

Geoffrey Dunn (Partner and Equity Analyst)

Okay. All right. Thank you.

Operator (participant)

This concludes our question and our decision. I'll now hand back to the closing remarks.

Adam Pollitzer (President and CEO)

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

Operator (participant)

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