Friday, November 9, 2012

Mortgage Insurance: Part 3

One issue I did not mention in my prior pieces on mortgage insurance was that MGIC had sued Freddie Mac over capital requirements that Freddie had imposed on MGIC which, if implemented, would have precluded MGIC from writing policies.  That suit is apparently in the process of being settled:

There are some possible stumbling blocks to this resolution, however.  Namely, Freddie (and the Wisconsin insurance commissioner, which oversees Milwaukee-based MGIC), want assurance that MGIC is sufficiently capitalized to cover its risks in certain states.  As a result, MGIC's holding company will have to make a capital infusion into the MGIC unit -- although a significantly lower one than originally required by Freddie. 

In the type of shell game we have come to expect in the financial and insurance sectors of our economy, MGIC has gotten Freddie's approval for an end-run around its overly high risk ratio in other states:  it will simply have a new unit, MIC, which has a lower risk ratio than MGIC, write policies in these other states.

My take:  state and federal regulators, Fannie, and Freddie all want MGIC to survive -- although it is possible that MGIC will be unable to meet even the reduced requirements set forth by these entities.  So MGIC undeniably presents some investment risk.  Putting aside the moral implications of yet another example of rules being changed to allow failed institutions to survive -- this blog is about investing, not philosophy -- MGIC looks like a pretty good junk bond equivalent.  

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