Is Mortgage Insurance The Next Domino?

Although everybody hates mortgage insurance (MI or PMI as it is known) we’ve once again become dependent upon it. Those who have recently purchased homes know that the 2nds used in “80-10s” and “80-20s” to avoid mortgage insurance are gone.

But have the MI companies ignored the risks in their excitement about being invited to the dance? Let’s hope not. Here’s an interesting article to check out:

Strains Evident on Mortgage Industry’s Line of Defense Claims skyrocket at MGIC; losses expected for ‘08 American BankerAmerican Banker / By Harry Terris
October 18, 2007

In a sign of just how severe residential credit losses are getting, MGIC Investment Corp., the largest mortgage insurer, posted a third-quarter loss of $372 million Wednesday, projected a staggering increase in claim payments, and said it expects to continue to lose money through next year. Citing an unexpectedly rapid deterioration of conditions in California and Florida and continued weakness in the Midwest, the Milwaukee company said it expects home prices across the country to drop 10% over the next 18 months.

Delinquent loans insured by MGIC jumped about 13% from the second quarter, to about 91,000 - an increase the company characterized as unprecedented. But it said the biggest factor in its expectations is the amount it expects to pay for each claim.”The dominant theme of the quarter and in fact next year is losses,” Curt S. Culver, its chief executive, said on a conference call. The report was the most bearish one from a mortgage insurer in the current credit cycle, but there have been other signs of stress. Fitch Inc. revised its capital model for rating mortgage insurers, resulting in downgrades for at least two companies in August.

During MGIC’s conference call, Nandu Narayanan, the chief investment officer of Trident Investment Management LLC, said the possibility of an economic downturn and “the worst housing market since the Great Depression” put MGIC’s “very survival in question.” Mr. Culver replied: “I don’t agree with you in any respect. Employment is very strong. � I don’t see any issues relative to employment. I see new underwriting standards. � I see new pricing. � We’ve modeled in, I think, very draconian loss estimates.”

Despite the bleak outlook, MGIC insisted that its risk-capital ratio of 7 to 1 is an ample cushion. But in a note issued Wednesday, Geoffrey Dunn, an analyst with KBW Inc.’s Keefe Bruyette & Woods Inc., wrote that risk-capital ratios have “grown largely meaningless with the different risk products now written” by mortgage insurers. The amount of claims MGIC paid out last quarter rose 48% from a year earlier, to about $232 million. The company projected a further increase of 16% to 25% this quarter.

Next year it expects claims to range from $1.2 billion to $1.5 billion.Also Wednesday, MGIC said it had written off its entire position in the subprime mortgage joint venture C-Bass LLC and had taken a $303 million after-tax charge. (MGIC had warned of the possibility of a total writedown over the summer.) However, it did not record an impairment to a $50 million loan made to C-Bass at midyear, and the charge was offset partly by a $106 million gain on the sale of part of MGIC’s stake in another venture.George A. Sacco, an analyst with JPMorgan Chase & Co., had written in a note issued last week that the losses for mortgage insurers during the oil patch crisis of the 1980s “highlight the potentially catastrophic nature” of the current problems.

But Mr. Culver said the current situation is “a far different story” from the oil patch crisis, when exposure to troubled markets was more concentrated. “You had severe market deterioration in the oil patch states, where you had” delinquency rates of “sometimes 30 to 40″ for every 100 homes. “This is not the case here. These are more isolated houses.”MGIC said the share of its business made up of loans with risky attributes � such as high loan-to-value ratios, limited borrower documentation, or borrowers with poor credit histories � has kept rising.

However, it also said that a sectorwide move toward agency mortgages and higher demand for insurance in an environment of heavy credit losses would spur growth in its portfolio.Mr. Culver said MGIC will adopt new underwriting guidelines and increase prices next month.The company also said that even though this year’s mortgages are performing a bit worse than last year’s, it expects the quality of new loans to improve dramatically.Fitch Inc. affirmed its AA insurer ratings for MGIC, but cut its outlook for the insurer to “negative,” from “stable.” (According to MGIC, a rating of at least AA-minus “is critical to a mortgage insurer’s ability to continue to write new business.”) Standard and Poor’s Corp. put its AA ratings for MGIC on its CreditWatch list with negative implications. MGIC’s shares plunged 15.3% Wednesday.

If the MI companies underestimate risk in their exuberance, look for the MI component of your monthly payment to increase. Let’s hope Congress votes to extend the tax deductibility into 2008.

Does your lender keep you informed about these potential changes? Is your lender full-time? Don’t entrust important financial decisions to an amateur. Call me.