The Wall Street Journal-20080215-Where Will the Crunch Hit Next-- Mortgage Insurers- Latest Corner Exposed- Stare at Downgrades

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Where Will the Crunch Hit Next?; Mortgage Insurers, Latest Corner Exposed, Stare at Downgrades

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Mounting losses and the threat of credit-rating downgrades are hitting another obscure corner of the insurance industry -- mortgage insurance -- and adding to strains on the housing market.

Rising claims on policies mortgage insurers sold during the housing market boom are hitting hard. MGIC Investment Corp., a Milwaukee-based firm that is the largest mortgage insurer in the country by market share, said this week that it posted a $1.47 billion loss in the fourth quarter. A much-smaller rival, Triad Guaranty Inc., based in Winston-Salem, N.C., this week reported a $75 million quarterly loss.

Investors have punished the stocks the past year, sending the shares of some down 90%.

But the mortgage insurers are not in danger of going bust, and their travails aren't causing widespread problems in the financial system. They are getting help, in the form of higher rates, tighter underwriting standards and, yesterday, a move by Freddie Mac that should allow them to rebuild capital.

The problems are forcing mortgage insurers to adopt stricter underwriting standards. MGIC, for instance, won't insure borrowers who won't put down at least 5% in four states -- Arizona, Florida, California and Nevada -- and major metropolitan areas in many others. The change is already in effect in Florida and California and will take effect in the other places in March.

The result of such moves is that some people who have trouble scraping together a down payment -- typical mortgage-insurance customers -- could find it harder to purchase a house. The tightening is "another thorn in the consumers' side," says Ivy Zelman, chief executive of Zelman & Associates, a housing research firm.

In a conference call with investors this week, Curt Culver, MGIC's chief executive, acknowledged that the firm could get less business as a result of underwriting changes and higher prices for some policies. But he called that business "better lost than insured."

Mortgage insurers sell policies that promise to repay a certain percentage of the loan, usually 25% to 35%, if the borrower defaults. Lenders often want borrowers who can't make a customary down payment, usually 20%, to buy the insurance. Freddie Mac and Fannie Mae, government-sponsored firms that buy up many of the nation's mortgages from lenders, rely on the insurers to cover part of their risks for loans that total 80% or more of a home's estimated value.

With more homes going into foreclosure, mortgage insurers are seeing losses mount. Falling home prices make the situation worse, because it becomes that much harder to recover losses from the sale of a house that has been foreclosed on.

Yesterday, in a demonstration of concern about the insurers, Freddie said it will suspend its policy of imposing tighter capital requirements and other restrictions on mortgage insurers if their ratings are cut below double-A -- or the equivalent. Ratings services have said in recent weeks that a number of the mortgage insurers face the prospect of downgrades.

Freddie also imposed a 25% limit on the amount of premiums the insurers can pass on to so-called captive insurers, which are generally owned by mortgage lenders and cut into the profits of mortgage insurers because they were forced to split their premiums with the mortgage lenders. In recent years, the captives have often grabbed 40% of the premiums.

Freddie says the mortgage insurers will be able to rebuild their capital faster if they retain more of the premium income.

Freddie is "making it very clear that they see an ongoing role" for the mortgage insurers, says Howard Shapiro, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York. "There is a public-policy imperative" to maintaining mortgage insurers, he says.

A Fannie spokesman said the company is "evaluating a set of options" regarding the mortgage insurers.

Weakened mortgage insurers could create an opportunity for investors with deep pockets, because demand is driving up mortgage-insurance prices. Warren Buffett's Berkshire Hathaway has profited by swooping into stressed insurance markets under such circumstances in the past, and recently announced plans to start up a new bond insurer.

The current problems are also cutting into insurers' available capital. With less money on hand, they may not be able to write as many policies, which could also hamper any housing recovery by making it more difficult to find the protection.

"Even though there's opportunity now with attractive pricing, they're going to have to be more disciplined in the business they take on," says Thomas Abruzzo, a managing director at Fitch Ratings.

Yesterday in 4 p.m. New York Stock Exchange composite trading, shares of MGIC stood at $13.13, up 52 cents. Triad was up 21 cents at $6.22 in 4 p.m. Nasdaq composite trading. Among other major bond insurers, Radian Group Inc., which is slated to report earnings today, was down 41 cents, or 5.6%, to $6.92, and PMI Group Inc. was up 11 cents to $7.35, both on the NYSE.

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Karen Richardson contributed to this article.

(See related article: "Fund Track: Closed-End Funds That Wield Leverage Expect Trading Delays" -- WSJ February 15, 2008)