Mortgage insurers' shares hurting on subprime concern

MGIC Investment Corp., the largest U.S. mortgage insurer, was the top gainer in the Standard & Poor's 500 index on Feb. 6, the day it agreed to buy No. 3 mortgage insurer Radian Group Inc., of Philadelphia, for $4.9 billion.

In the five weeks since, it has become the 10th-worst S&P performer.

Increasing defaults by risky, or "subprime," borrowers have spurred concern that mortgage insurers will pay higher claims to bail out lenders. Shares of MGIC have dropped 19 percent, and Radian's are down 20 percent since the deal was announced.

The PMI Group Inc., the No. 2 insurer, has declined 16 percent.

Mortgage insurance is typically required when a borrower's down payment on a house is less than 20 percent of the property's value. Insurers guarantee that lenders and investors such as Fannie Mae and Freddie Mac, which buy packages of debt, will be repaid if the borrower defaults.

Since the MGIC-Radian deal was announced, losses at New Century Financial Corp., the country's second-biggest subprime lender, forced it to stop making loans, and analysts say the company may soon file for bankruptcy.

New Century said yesterday that it had received cease-and-desist orders from banking regulators in four states, contending some subsidiaries of the troubled subprime-mortgage lender had violated state laws.

Regulators from New Jersey, New York, New Hampshire and Massachusetts sent notices to the Irvine, Calif., company Tuesday, according to its filing yesterday with the Securities and Exchange Commission.

In the letters, the state regulators contended New Century subsidiaries had failed to fund mortgages that closed and did not notify the states in a timely manner of its financial woes.

Also yesterday, H&R Block Inc. said it was increasing its third-quarter loss after cutting the value of a subprime-mortgage subsidiary. Earlier this week, Countrywide Financial Corp., the nation's largest mortgage lender, said it stopped funding most subprime loans.

Subprime delinquencies in the fourth quarter reached a four-year high, and the number of mortgages entering foreclosure rose to an all-time high, the Mortgage Bankers Association said Tuesday.

"There's investor fear that credit quality in mortgages is deteriorating," said Mark Patterson, a managing director at NWQ Investment Management Co. L.L.C., of Los Angeles. It was the largest shareholder of Radian and second-biggest investor in MGIC as of December.

"Investors are extrapolating, anticipating some of what affected subprime may spread to higher credit-quality loans," Patterson said.

MGIC shares yesterday fell 86 cents to close at $56.65 in New York Stock Exchange composite trading. Radian fell 89 cents, to $53.17, and PMI declined 42 cents, to $42.29.

MGIC, Radian and PMI all said they avoided insuring too many of the riskiest mortgage loans and are optimistic that defaults will increase demand for their products. MGIC promised savings in personnel and computer costs from the Radian acquisition, which is expected to close by the end of 2007.

Subprime loans accounted for 14 percent of MGIC's coverage, 11 percent of Radian's, and 8.5 percent of PMI's as of Dec. 31, according to the companies.

Industrywide, 15 percent to 20 percent of the mortgages covered by insurance are "Alt-A" or "liars" loans, estimated Matthew Roswell, an analyst at Baltimore-based Stifel Nicolaus & Co. Inc. Those are loans in which borrowers technically are not in the risky category, but they often have little or no verification of their income and creditworthiness, he said.

MGIC and Radian had about 17 percent of their insured loan value in Alt-A at year-end, and Walnut Creek, Calif.-based PMI, 20 percent. Radian had 5.3 percent of Alt-A loans in default in the fourth quarter, down from 6.3 percent a year earlier.

MGIC and PMI did not disclose Alt-A default rates, but said claims were not unexpectedly high.

"Historically, these were relatively good-quality borrowers who missed 'prime' requirements in one category or another," Sanford Ibrahim, Radian's chief executive officer, said in an interview this week.

"A number of subprime lenders had eased underwriting standards considerably, but there's scant evidence that's going to affect the mortgage insurance industry," said Patterson at NWQ Investment. "What matters is the economy: Do people have jobs? And those issues are fine."