The Wall Street Journal-20080123-Credit Crunch- Markets- Ride- Mortgage Insurers Lifted- But Default Fears Persist
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Credit Crunch: Markets' Ride: Mortgage Insurers Lifted, But Default Fears Persist
Mortgage insurers, which promise to help repay home loans if borrowers can't, have a lot riding on a key question surrounding yesterday's sharp interest-rate cut: Will it be enough?
If the Federal Reserve's latest move means that a significant number of homeowners can refinance their loans at more affordable rates, the industry, which has been facing mounting losses in recent months, could get a meaningful boost. A healthy mortgage-insurance industry would make it easier for the housing market to recover.
Those losses could be stanched if more borrowers are able to stay in their homes and keep making payments. Mortgage insurers could also benefit if the rate cut boosts the economy and holds down unemployment, which has traditionally been one of the driving factors in claims for the industry.
Investors cheered the Fed's move, lifting the stocks of two of the nation's largest mortgage insurers, MGIC Investment Corp. and PMI Group Inc., nearly 14%. Still, PMI shares are down 85% since June and MGIC's shares have fallen 75% since then. Unlike bond insurers, the mortgage insurers don't pose a risk to the overall financial system.
Still, it isn't clear whether yesterday's rate cut will be enough to make refinancing into a lower interest-rate loan affordable for many homeowners.
"That's what we really don't know," says Daniel Kelly, the director of mortgage-insurer relations at Freddie Mac, one of the government- sponsored mortgage investors that are the main users of mortgage insurance.
And if the mortgage market and the economy don't pick up, the possibility of ratings downgrades looms over the industry -- a threat that is likely to grow if the downturn is deep and protracted.
If the unemployment rate tops 6%, up from its current 5%, "it becomes a much more difficult environment for mortgage insurers," says James Brender, an analyst at Standard & Poor's.
Freddie Mac and Fannie Mae both typically want borrowers to have mortgage insurance if the borrowers put down less than 20% of a home's purchase price. The policies guarantee repayment of the mortgage up to a certain level.
As a result, a healthy mortgage-insurance industry is important to making home purchases possible for people who have trouble scraping together the money for a down payment.
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Damian Paletta and James R. Hagerty contributed to this article.
