By agreeing to buy Clayton Holdings for $305 million, Radian Group is essentially betting that the private mortgage securitization market will make a comeback.
Clayton provides outsourced services such as loan reviews and due diligence for mortgage-backed securities deals—demand for which would presumably pick up if private issuance takes off again. S.A. Ibrahim, Radian's chief executive, figures it's only a matter of time before that rebound happens.
"Banks will try and relieve capital pressure" by turning to private label securitizations of loans held in their portfolios, Ibrahim said Wednesday on a conference call with investors and analysts. This is one of the reasons Radian believes the private-label MBS market will grow, although not to the levels seen before the crisis.
Even with fewer or smaller deals, quality control should be in hot demand as memories of the mortgage crisis linger, Radian reckons. Clayton, after all, is the firm whose former president revealed glaring risk-management lapses in the bubble-era securitization process to the Financial Crisis Inquiry Commission in 2010.
The new pools are likely to have due diligence requirements that are "much more extensive, where a much larger number of loans, whether it's 100% or something just less than that, have to be reviewed in order for a deal to go forward," said Teresa Bryce Bazemore, the president of Radian Guaranty, the company's flagship mortgage insurance unit. "So we think that the securitization market doesn't have to get back to the levels that it had been before in order for Clayton to benefit."
The deal comes as Radian faces a new competitive landscape in its core business. Over the past few years, the Philadelphia mortgage insurer has been aggressive in adding new lender customers. It finished 2013 as the industry's largest company in insurance in force, and second by new insurance written, according to MortgageStats.com.
But since the crisis Essent (which is now a close fifth in new insurance written behind legacy insurer Genworth), National MI and Arch US MI have entered the fray.
"We did see some shift in the market share from the third quarter of last year until now. That's one of the reasons why we continue to be very focused on bringing on new customers," Bazemore said.
Adding Clayton is "another way that we differentiate ourselves from our mortgage insurance competitors," Ibrahim said. Radian is "positioning ourselves for what we believe is the next opportunity in the future of the housing finance system in an area where we have already started doing things, to a small extent, on our own."
Clayton, based in Shelton, Conn., also offers servicing surveillance and foreclosed-property services, which would provide additional revenue streams to complement Radian's core private mortgage insurance business.
"While the significant upside opportunities from the acquisition depend on many things, including the growth of the private securitization market, Clayton is already a strong and successful company on a standalone basis," Ibrahim said.