PhillyDeals: Insurer ventures back into a high-risk pool

Just two years after bad low-down-payment home loans provoked the credit crisis that melted the economy, a Radnor company backed by Wall Street millions is betting attempts by President Obama's administration to restart the housing industry will mean big profits.

From where? Well, from more low-down-payment home loans.

"We can all learn from the mistakes of the past," Mark A. Casale, founder of Essent Guaranty Inc., told me yesterday, hours after getting the green light from Pennsylvania regulators to start insuring home loans.

Essent plans to sell the policies that mortgage finance giants Fannie Mae and Freddie Mac typically require, to buyers who put up less than 20 percent

of a home's value and borrow the rest.

How are mortgage insurers now smarter than mortgage insurers were? "We are building a risk-sensitive culture," Casale said. That means, for example, that prices will be higher.

Casale says he has hired 20 people and plans to employ "90 to 100" by year's end, making Essent a happy exception to the hiring freezes and layoffs at other financial employers.

Pennsylvania "recognized the need" for the company "to help our citizens achieve homeownership," state Insurance Commissioner Joel Ario said in a statement released by Essent, which expects approval in other states soon.

By Casale's calculation, loans with less than 20 percent down used to account for a tenth of the home-loan market. Now, they're maybe 5 percent of a shrunken industry. But that still worked out to $45 billion in the first six months of 2009, "all through Fannie Mae and Freddie Mac," which were taken over by the government amid massive losses last year.

Obama has resisted calls to sell or close Fannie and Freddie. He and Congress have called for programs to support first-time home buyers, who often have little money for down payments and need mortgage insurance.

So big Wall Street players are banking on Essent. The company has raised $500 million from Pine Brook Road Partners L.L.C. of New York and the two most profitable U.S. banks - Goldman Sachs Group Inc. and JPMorgan Chase & Co. - plus two big reinsurance companies, PartnerRe Ltd. and RenaissanceRe Holdings Ltd.

Casale used to work at one of the biggest mortgage insurers, Radian Group Inc. of Philadelphia, which grew by insuring home loans to subprime borrowers with little cash and shaky credit. As lenders stopped making such loans and losses rose in 2007, Radian's share price fell from the mid-$60s to below $10, where it remains.

Old-fashioned bankers thought that meant high-cost, high-risk loans had gone out of style for the foreseeable future. "You should put 30 percent down on a house," as Gerard Cuddy, chief executive officer of Beneficial Bank, the biggest bank left in Philadelphia, told me last month.

Yet the tough market also created opportunity for a new player unhindered by past losses.

When the mortgage crisis hit, "we called Mark and asked if he could think of opportunities that would come out of this crisis," Robert Glanville, partner at $1.4-billion-asset Pine Brook, told me.

Pine Brook looks for "dislocated" industries, and that describes mortgages, Glanville added. "We'll be able to put our capital to work at the kind of returns we need to sustain our business."

Before joining Radian, Casale (La Salle High; St. Joe's University, accounting; NYU, M.B.A.) was a lender at Advanta Corp.'s former mortgage unit.

"I grew up under [former Advanta executives] Rich Greenawalt and Milt Riseman," Casale told me. "They each had long careers at Citigroup under [Citi CEO] Walter Wriston, back when banking was banking. That means a culture of control, profitability, and growth."

Wasn't Wriston also famous for pitting executives against one another? Greenawalt "taught us better," Casale said. "He said, 'Always aim your arrows outward' " at competing companies, not one another.

That's what Casale says he wants to build at Essent: part lender, part insurer, and all tuned to the recovery of the American idea that homeownership is within reach for most people - and at prices American finance can calculate without self-destructing.