Fitch Ratings warns Australian lenders’ mortgage insurance (LMI) underwriting profits will remain under pressure this year due to challenges lifting top-line revenue and a softer housing market.

LMI business profiles are also vulnerable to intensified competition following the granting of a licence to a new domestic player in January, it says in a report.

“We think LMI premiums may not recover any time soon,” Fitch says.

A recent proposal by the Australian Prudential Regulation Authority (APRA) to provide capital relief for banks using internal models from January 2022 may improve premiums, according to the ratings agency.

APRA’s easing of various mortgage underwriting limits over the past year has lifted bank lending capacity, but relatively tight lending standards continue to affect the riskier high loan-to-value lending area that is the main source of LMI business.

“Intensified regulatory scrutiny of mortgage lending practices and bank risk profiles from 2014 has reduced the volume of higher [loan-to-value] mortgages,” Fitch says.

“This, together with increased lender-risk retention, has sharply lowered LMI premiums.”

On January 17 APRA authorised Arch LMI to conduct business as a lenders’ mortgage insurer.