All is Fair Game

Updates 07/16/2009
July 16th, 2009 4:28 PM

MGIC Investment Corporation announced on Thursday that it plans to reorganize its operations in response to widening losses from its core business.

MGIC and its subsidiary Mortgage Guaranty Insurance Corporation reported a net loss for the quarter ended June 30 of $339.8 million or $2.74 per diluted share. Losses during the same quarter of 2008 were $99.9 million or $0.81 a share.

The company's losses thus far in 2009 total $524.4 million compared to $134.4 million last year. On a diluted share basis the loss rose from $1.29 to $4.22.

MGIC is a leading issuer of Private Mortgage Insurance (PMI). These are policies written on individual residential mortgages when borrowers do not provide a 20 percent down payment. The policies are purchased by the home owner but insure the lender bank against loss.

Curt S. Culver, chairman and chief executive officer blamed MGIC's growing financial difficulties on mounting delinquencies and foreclosures of residential mortgages insured by the company due to the weakening economy, job losses, and falling home values but said that the company has adequate resources to cover its obligations on its current book of business.

Delinquent loans, including bulk loans increased to 14.97 percent of the companies' portfolio from 8.6 percent the year before.

Under the announced reorganization, MGIC plans to shift writing of new policies to another subsidiary, MGIC Indemnity Corporation and cease writing any new business within the parent company. To this end, MGIC has reached an agreement with the Wisconsin Commissioner of Insurance that will allow it to contribute up to $1 billion to MGIC Indemnity in two installments starting this month.

If MGIC must continue to write policies through the parent company it will need either additional capital or relief from capital requirements in 16 of the states in which it does business. To that end, the company has also had talks with the U.S. Department of the Treasury about a capital investment.

Even with the funds transfer agreement from the home state insurance commissioner, MGIC has a long way to go to effect the planned reorganization. Wisconsin authorities have not yet given permission for the subsidiary to actually write policies and similar permission must be obtained from each of the states. The indemnity company must also be approved as an eligible insurer by Freddie Mac and/or Fannie Mae.

The company stated, "We cannot predict whether these approvals will be obtained and if so on what conditions. If we cannot execute that plan we will need to re-evaluate these other options."

After the companies' financials were announced, Fitch Ratings downgraded its ratings for MGIC from "BBB" to "BBB-" and placed it on Ratings Watch Negative. The BBB- rating is the lowest investment ratings grade.

After an initial drop early in the day, the company's stock was trading near the close at $4.88, up $0.94 from Wednesday's close.


Mortgage rates took another step higher yesterday following a 3% rally in the stock market. Tame inflation and “not as bad” industrial production numbers have resparked the green shoots theory of a quick economic recovery. Market participants, not wanting to miss out on the rally, quickly sold their fixed income investments to move their money into the higher risk but higher return equity markets. In total, mortgage backed securities moved lower in price (as price moves lower, rates move higher) by 75 basis points which forced all lenders to reprice for the worse with some issuing a couple reprices as the losses snowballed into close. Losing much more was MBS’s closest relative, the benchmark 10 year note, which sold off and moved to a higher yield of 3.63. Just a few days ago, the 10 year note was trading under 3.30 in yield. After mortgage rates briefly touched 4.875% the other day, they have quickly turned and by day’s end yesterday par was sitting at 5.25%.

JP Morgan reported much better than expected earnings this morning. Analysts had expected a 5 cents per share earnings but they reported 2nd quarter earnings of 28 cents per share or $2.7 billion. After the much better than expected earnings from Goldman Sachs earlier this week, many anticipated similar results from JP Morgan which fueled the rally in equities.

The U.S. Department of Labor this morning released the weekly jobless claims for unemployment insurance report. This data set calculates the number of Americans who filed for first time unemployment benefits in the prior week. Today's report indicates that jobless claims fell from last week’s upwardly revised 569,000 to 522,000. Estimates from economists were for 535,000 first time claims. Continuing claims, which reports how many people continue to file due to lack of finding a new job, fell by 642,000 ? its largest amount in history ? from 6.883 million to 6.273 million. The Labor Department is warning that the better than expected numbers are being distorted by seasonal issues owing to the fact that layoffs in manufacturing happened earlier than usual.

The final report of the day comes from our friends at the Federal Reserve Bank of Philadelphia with the release of the Philly Fed Survey. This survey lets market participants know the strength of manufacturing around the Philadelphia region. Last month’s survey improved by a large margin moving from -22.6 to -2.2 which was the best reading since September of 2008 and far exceeded estimates. Readings below 0 indicate that business conditions are contracting while readings above 0 indicate expansion. Economists surveyed for this month’s survey were expecting a slight decline to -5.0. The survey in fact showed business conditions in the region contracting more than expected at a -7.5 read. Following the release, both MBS and treasuries moved to their best price of the day.

So far today, the fixed income sector is trying to rebound from the beating they took yesterday. Currently, the benchmark 10 year treasury note is rallying and is currently trading at a yield of 3.51 after closing yesterday at 3.63. MBS are moving higher in price as well and are currently recapturing over half of yesterday’s losses. Since MBS are moving higher, if you are currently floating continue to do so until later today. This will allow time for lenders to pass along the improvements, but things can change very quickly so we must remain defensive. You can check MBS prices by clicking over to Mortgage News Daily’s Mortgage Rates page.

Reports from fellow mortgage professionals are indicating that the par 30 year fixed rate conventional loan is in the 5.125% to 5.375% range for the best qualified consumers. If you are securing government financing, FHA or VA, expect your rate to be about .25% higher. The sell off yesterday in MBS should have resulted in higher mortgage rates this morning; however, there are two things helping rates. First, AQ informs me that most lenders locked in their pipelines in early July at the highs of MBS price which allows them to pass along pricing based on last week’s MBS price. Secondly, the move higher in interest rates last month has lessened the supply of mortgage applications for lenders to underwrite. How can a lender encourage more loan applications to be submitted? That’s right, offer better pricing.


As the unemployment rate approaches double-digits, almost two million homes received foreclosure filings in the first half of 2009, 15% more than in the same period for 2008, and 9% more than in the previous six month period, according to a new industry survey.

RealtyTrac, an online marketplace for foreclosure properties, said 1.905 million foreclosure filings, default notices, auction sale notices and bank repossessions were reported on 1,528,364 U.S. properties between January and June.

To put that into context, 1 in 84 (or 1.19%) of all housing units in the US received at least one foreclosure notice during that period.

“In spite of the industry-wide moratorium earlier this year, along with local, state and national legislative action and increased levels of loan modification activity, foreclosure activity continues to increase to record levels,” said James J. Saccacio, CEO of RealtyTrac.

The most recent data doesn’t point to an easing in foreclosures. The final month of the period, June, reported 336,173 foreclosure filings, marking the fourth straight month that saw filings exceed 300,000

Moreover, the second quarter was worse than the first. In Q2, 889,829 properties received foreclosure filings, an 11% increase from the previous quarter ? and a whopping 20% higher than Q2 2008.

Saccacio added: “Stemming the tide of foreclosures is a critical component to stabilizing the housing market, so it is imperative that the lending industry and the government work in tandem to find new approaches to address this issue.”

For regional data, see the full report here



By: Favian Clai
When homeowners are in trouble with their mortgage, they typically turn to paid "mortgage fixers" or nonprofit housing counseling services. Though many are finding help from their Private Mortgage Insurance company or PMI for short.

What is Primary Mortgage Insurance?

PMI, or Lenders Mortgage Insurance, is an insurance policy payable to a lender or trustee for the pool of securities involved in a mortgage loan. Its purpose is to offset the losses when a mortgagor is not able to repay their loan, and the lender is unable to recover their costs after foreclosure or sale of the property.

This type of insurance is typically required by a lender to protect their investment in your home if you made a down payment of less than 20% on your home. For some, it may be required for a fixed period of time, and others may be required for the lifetime of the loan.

How are PMI Companies Helping Homeowners?

PMI companies are starting to put themselves in the shoes of homeowners and working with homeowners to try and keep them in their homes. PMI Group, a California-Based PMI company offers a no-interest loan to help certain borrowers catch up on mortgage payments that are in default. Another company, Genworth Financial now offers a "Job-Loss Protection" clause in their policy that pays up to $2,000 per month towards the mortgage payment of a homeowner after losing their job.

Some are taking even further steps by working with homeowners to see if they qualify for a loan modification under the government's Making Home Affordable program and working with them through the program. If the homeowner cannot get their loan servicer to help with the paperwork, companies like Genworth may step in to help process the paperwork and streamline it to the servicer for approval.

How it Benefits the PMI Company

These programs are of course designed with one basis in mind, to reduce the potential losses of the private mortgage insurer. A typical default may cause a PMI company to pay out on an estimated 35% of a home's value currently.  A good run on any insurer from these defaults could mean catastrophe in the market.

Doing the Math to Understand Their Risk

On a $150,000 mortgage, this could come out to a loss of $52,500 for the insurer.  The average cost per $100,000 insured is $55 a month. This would equate to just under $1,000 a year. If this homeowner defaulted, it would take over 52 homes that don't default to break even.  With foreclosures on the rise, the risk to these PMI companies increases, and with the numbers not in their favor, you can see how it makes sense, for these companies to work with homeowners to mitigate their risk.

The Limitations of the Programs

As you can expect, PMI companies are doing this to mitigate their risks, while helping homeowners. In order to qualify for some of these loan offerings by your PMI company, you must prove that your delinquency was the result of a temporary reduction in cash flow and that you have a good prospect of repaying the loan. You must also continue to make payments to your mortgage during this time.

In the case of Genworth Financial's program, their "Job-Loss Protection" program is only valid for those who have closed their loan within the past three years. According to a company spokesman for Genworth, about 10% of the company's loans who are eligible are taking advantage of the program. However, expect that as the costs of these programs climb higher, further restrictions and requirements may be imposed.




Posted in:General
Posted by Greg Shelley Phd on July 16th, 2009 4:28 PMPost a Comment

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