If there has ever been a time to make a campaign for mortgage insurance, current market conditions dictate that the time is now.
With the crackdown in underwriting standards, insurance is the only method to secure a mortgage without putting a minimum of 20% down. However, continued delinquencies are cutting into mortgage insurers' (MIs) ability to write new deals and maintain capital.
MGIC Investment Corp. reported a net loss for the first quarter of $34.4 million, compared with net income of $92.4 million for the same quarter a year ago. Losses incurred in the first quarter were $691.6 million, up from $181.8 million reported for the same period last year.
Ironically, however, business for the company is up. New insurance written in the first quarter was $19.1 billion, compared with $12.7 billion in 1Q07.
Though other MI companies, including PMI Group, Radian Group and Triad Guaranty, have yet to report first-quarter results (Radian is set to announce them on May 12), losses mounted at the end of 2007, with PMI posting a net loss of $236 million in the fourth quarter of 2007. Radian Group suffered a mammoth net loss of $618 million, and Triad lost $75 million in the fourth quarter as a result of the continuing deterioration of the housing market, the company said.
However, new insurance was up across the board for these companies, driven by strong growth in net premiums written and earned.
"Investors or lenders are looking to offload mortgage-related credit risk," said Steve Stelmach, an analyst at Friedman, Billings, Ramsey & Co. "To the extent that you can offload that to a mortgage insurance company, that means more business for those MI guys."
Insurance in force (the total amount of insurance a company has issued as measured by the dividends paid and the face values of the policies written) for Triad at the end of 2007 was $123.6 billion, representing a 20% increase from one year ago.
Risk Factors Mount
However, the insurers face challenges ahead as they struggle to take advantage of increasing demand and decreasing reserves. "Right now we are seeing claims because of bad products and weak housing markets. If you throw on another layer of claims from job loss, that means worse operating results and more depletion of capital," said James Brender, a director at Standard & Poor's.
The bond insurers have also faced ratings downgrades across the board. Fitch Ratings made multiple downgrades to Triad's insurer financial strength rating, the latest of which was to BB' from BBB-', and Standard & Poor's downgraded the insurer to BBB' from AA-'. Moody's Investors Service also cut its financial strength rating for Triad to Baa3' from Aa3'
The other mortgage insurers have faced similar consequences. S&P slashed MGIC, PMI and Radian from double-A territory to single-A territory, and the outlooks are negative across the board, with the exception of a credit watch negative on Radian, Brender said, noting that this is a bit worse than a negative outlook. Early this month Fitch withdrew Radian's ratings, citing the lack of adequate information on the company. Radian requested that Fitch withdraw its ratings in September 2007 after a previous downgrade. When Fitch didn't oblige, the company stopped providing the rating agency with sufficient portfolio information.
Traditionally, the mortgage insurers have had to maintain a double-A-minus rating to be able to access the flow of mortgage loans being sold to the GSEs. However, given the necessity of mortgage insurance as Fannie Mae and Freddie Mac take on increasingly larger loans, which could put additional pressure on their balance sheets, the GSEs might bend the rules, market participants agree.
"The body language that is being given by the GSEs indicates that they are willing to give the MIs a little bit more leeway," Stelmach said. "And it makes sense from the GSE perspective. You would rather have a mortgage insurer between you and credit losses than no mortgage insurer. I think they will continue to be forgiving as long as the MIs are prudent in their underwriting and prudent with their capital."
Furthermore, while a double-A-minus requirement is a laudable goal, a single-A financial strength rating still represents strong claims-paying ability, Brender said. But, as a result of a downgrade, he noted, the Office of Federal Housing Enterprise Oversight could require a higher capital charge for a single-A mortgage insurer than a double-A-minus insurer - however, that remains to be seen.
Not a Soft Cushion
But writing new business will continue to pressure the MIs. "There is going to be an issue of capacity throughout all the players, and capacity is a function of capital. To the extent that companies can raise capital, and do it relatively efficiently, they will be able to assume more business," Stelmach said.
Brender noted that there could be a liquidity issue causing MIs to breach covenants in their credit lines.
However, the market appears optimistic and, as a result, flexible in helping these companies navigate through rocky economic conditions. But it does come with a price. Radian Group recently announced that it is permanently amending its revolving credit facility to eliminate a ratings covenant, which will give the company greater flexibility with respect to the minimum net worth that it must maintain. In return, Radian has agreed to certain other conditions and covenants, most importantly, the facility would be secured and the commitment size would be reduced to $250 million from $400 million, with further reductions to take place if certain repayment events occur.
MGIC raised $420 million in a public offering of 42.9 million shares, as well as selling $483 million of convertible debt into the private market.
Private investors are also taking advantage of new insurance prospects for the more troubled companies. Triad Guaranty announced that it has entered into negotiations with Lightyear Capital, a New York-based private equity firm, to fund the creation of a new mortgage insurer. Under the terms, Lightyear and its investor group plan to provide up to $400 million. Upon completion of the deal, Triad will stop writing new business. The new company will incorporate some of Triad's existing assets, employees and technical support.
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