Friday, October 5, 2012

Follow Up on Mortgage Insurer Stocks As Junk Bonds

I've done some further reading on the mortgage insurance situation and it is interesting enough to merit a second post.  The below article is a good overview of the competing interests trying to stake claims in the mortgage insurance arena after 3 of the main players were shut down by regulators in the last few years (one of them, PMI).

Let me give you what I believe are the most salient points:

  • The Arizona Department of Insurance, acting as the receiver of the defunct PMI, has sued upstart would-be mortgage insurer NMI Holdings from improperly appropriating PMI assets. The suit could hinder NMI from selling mortgage insurance;
My thought:  former PMI employees are anxious to get back in the business
  • Private mortgage insurers, which have lost more than $18 billion since mid-2007, wrote $40.1 billion of coverage last quarter, or almost 10 percent of the $405 billion of new loans.
My thought:  I'm absolutely astounded that the industry wrote more coverage last quarter than the amount of losses suffered during the housing crash
  • MGIC’s preliminary ratio of risk relative to capital breached the level some regulators require to write new policies as of June 30, the insurer said Aug. 2.
My thoughts:  MGIC should probably be shut down but is being allowed to continue to operate
  • Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co (JPM), private-equity firm Pine Brook and reinsurer PartnerRe Ltd. are among backers of the industry’s other startup, Essent Guaranty Inc. The Radnor, Pennsylvania-based firm raised $600 million in 2009 and 2010 and began writing policies last year, providing 5.3 percent of coverage in the first half of this year.
My thoughts:  Goldman and JP Morgan see an opportunity in mortgage insurance.  The management team at Essent looks like it's been poached from other major mortgage insurers. 

One more thought, not from the article.  There was significant insider buying of shares in August of this year.  See
This is starting to look even more interesting.  I will continue to follow this industry.

Wednesday, October 3, 2012

Mortgage Insurer Stocks: Like Junk Bonds?

I recently ran across an article which mentioned the private mortgage insurer, MGIC.  I hadn't thought about the company in years.  Not since shorting it in the wake of the financial crisis and watching it pleasantly sink from about $38 to $24 before bailing out.  Only to regret my impatience later when it went nearly to zero.  At the time, although I was a major doomsayer, I did not foresee the complete collapse of the housing market.

Later, when the full scale of the disaster became evident, I was given to making pronouncements like:  "There is no way the mortgage insurers can survive.  Their liabilities are insurmountable."  And then just the other day, I was reminded of these thoughts after not thinking about the private mortgage insurance industry for several years.  My first reaction was "how are these mortgage insurers still in business?"  Some quick research revealed that not all of them are.  PMI, one of the major players, was seized and is now apparently a historical note.  But MGIC and Radian, two other big insurers, have survived.  The following article attempts to detail how this miracle could be:

I'm still not convinced but, that being said, if MGIC and Radian have survived the last four years, then it seems to me there are two possibilities.  One, they are getting ready to die, as PMI did last year.  Or two, they can survive anything and may very well run up if the housing market recovers to some degree.  In no way shape or form do I believe the housing market will make a significant recovery any time soon (I'll save my reasons supporting this assertion for another day).  However, the mortgage insurers would benefit from even a minor recovery in the housing market.  The article above details how MGIC is in much better position than Radian.  Some of the commenters believe otherwise.  In any event, if these two are still around, they may survive until the sun shines again...