MI Prospects Get Better

Perhaps, the mortgage insurance industry isn't looking so gloomy after all - which might be the reason why American International Group told bottomfeeder Wilbur Ross to take a hike in regards to buying its battered MI division, United Guaranty Inc. of Greensboro, N.C.

First, a little backstory. In the third quarter, every single one of the nation's six active MI firms saw a whopping - but not unexpected - decline in the volume of new insurance written. Every firm but one: UGI, which wrote $3.8 billion in new policies, a handsome 45% gain from the third quarter of 2008.

Every firm, including market leader MGIC, got creamed in the third quarter. Then again, UGI (which ranked second in new policies written) suffered miserably in the third quarter of 2008 because that's when credit markets tanked and Uncle Sam took over its parent company, American International Group. It's safe to assume that if Uncle Sam hadn't bailed out AIG, UGI would've closed its doors. But that was then. Amazingly, just one MI company has stopped writing policies during the mortgage market meltdown and all have managed to keep paying billions in claims and somehow stay afloat. Note to readers: MI firms cover 25% to 30% of a mortgage loss as opposed to FHA, which covers 100% of a loss.

Any way, smelling blood in the water, Mr. Ross of WL Ross & Co., pounced on UGI. This past fall, according to sources familiar with the original parameters of the talks, WL Ross offered to purchase all of UGI's licenses, operating systems and its entire 2009 book of business, leaving the MI's "legacy" coverage with AIG. No price was ever mentioned but you can bet that it was dirt cheap.

Mr. Ross is a smart man. The money he made bottom fishing in the U.S. steel industry is legendary. He's already gobbled up at least two near-dead mortgage servicing companies, fashioning them into American Home Mortgage Servicing, a specialty servicer of troubled and "scratch and dent" loans. At least check, AmHome ranked 11th nationwide in servicing contracts.

Mr. Ross also has his hand in a depository or two and knows that in time he'll need a lending arm if he wants to prevent his receivables from disappearing out the back door. As for why he wanted an MI firm, I'm not sure. The price must've been irresistible.

But there's something else afoot here. It's not just that the price was good, but perhaps it's true that the housing market has indeed turned the corner. The MI industry isn't out of the woods quite yet. They know that. We also know that at least one new MI firm will soon start writing new policies and another group of MI veterans is out raising capital to enter the space.

Why get into the MI business now? The answer is simple: Because of the mortgage/credit crisis, strict underwriting of all mortgages is the norm. Any loans funded in 2009 and beyond will be considered "pristine" with delinquencies considered highly unlikely. It's no wonder why Mr. Ross wanted into the business. From what I'm told, the head of AIG finally looked at the details of the Ross/UGI deal and came to the conclusion that as bad as its "legacy" book of business is that going forward, new premiums might lead UGI out of the desert.