Private mortgage insurers, MGIC Investment Corp. and Radian Group came under fire from Gimme Credit financial analyst Kathy Shanley last week, following a Friday the 13th earnings warning from MGIC that led to both company's stock dipping 12% (MGIC to $48.79, Radian to $35.16). In its warning MGIC cited continued refinance activity as well as rising delinquencies, trends that impact the whole mortgage insurance business.

But, Shanley took issue with one aspect that impacts these two insurers in particular share - the fact that MGIC and Radian jointly own non-performing loan purchasers C-BASS and Sherman Financial LLC. With both MGIC and Radian owning 46% of each enterprise, a major unforeseen spike in delinquencies could constrict liquidity at both of the publicly traded insurers.

"Radian says it has not made a capital contribution to C-BASS since it was acquired last year," pens Shanley. "Given the limited disclosure provided on the joint ventures, however, we're not sure there are no triggers that would require MGIC and/or Radian to provide further funding support. MGIC concedes that C-BASS in particular is lagging in the coming six-month period, due in part to increased prices in the whole loan market, where C-BASS buys its collateral. C-BASS made up 7.2% of MGIC's total EPS in the first half.

Rising delinquencies, however, is seen as an opportunity for C-BASS, as well as the lesser-known Sherman, both of which buy underperforming receivables, playing into what each considers its strengths. C-BASS, via its Litton Loan Servicing unit, prides itself on technical analysis and collection of delinquent loans and is considered a highly sophisticated investor.

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