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Fitch: MI Firms Won't See Recovery before 2010

New York-Fitch Ratings has downgraded PMI Mortgage Insurance Co., Genworth Mortgage Insurance Corp. and Mortgage Guaranty Insurance Corp. to outlook negative and is reviewing the ratings of several other insurers.

As to the overall mortgage insurance industry outlook, Fitch said it anticipates that insurers "will not return to profitability until 2010 at the earliest."

The ratings agency believes, however, that the prospects for future business are positive despite near-term challenges that may cause rising losses and limited new business options - since companies will likely need to conserve capital in the near term if the economic slowdown continues.

Fitch downgraded the insurer financial strength rating of Genworth Mortgage Insurance Corp., its U.S. operational affiliates, and Genworth Financial Mortgage Insurance Ltd. to A+ from AA.

Fitch downgraded the IFS rating of Genworth Financial Mortgage Insurance Pty Ltd. to AA- from AA. All ratings have been removed from Rating Watch Negative. The outlook on all ratings has been revised to negative.

The IFS ratings of Mortgage Guaranty Insurance Corp. and MGIC Australia Pty Ltd. also were moved to A- from A+.

Fitch has also downgraded the long-term issuer ratings of MGIC Investment Corp. to BBB- from BBB+, revising the ratings for these entities from Rating Watch Negative to Outlook Negative.

In addition, the agency has downgraded the IFS ratings of PMI Mortgage Insurance Co., its U.S.-based operational affiliates and PMI Mortgage Insurance Co. Ltd. (PMI Europe) to BBB+ from A+.

Fitch said it re-evaluated the AA- Republic Mortgage Insurance Corp. insurer financial strength to Rating Watch Negative and expects to issue separate commentary on this rating within one week.

The agency is also reviewing the IFS AA- rating of United Guaranty Residential Insurance Co. and has placed it on Rating Watch Evolving "as part of an overall review with regard to its ultimate parent company, American International Group Inc." whose long-term issuer default rating of A is on Rating Watch Evolving and consequently plans to issue commentary on United Guaranty in view of the updated AIG review.

Fitch said these actions reflect continued deterioration across the nation's MI industry, primarily due to exposure to mortgages originated in 2006 and 2007.

Mortgages originated in the first half of 2008 are not performing much better as shown by early performance statistics related to business insured at that time indicate this book of business "may perform poorly as well, given that some of the more meaningful underwriting changes were not fully incorporated until the second quarter of 2008."

Among the reasons for poor performance, Fitch quoted looser underwriting, increased incidence of fraud and sharp home price depreciation that resulted in high levels of early-term delinquencies that in turn caused the MI industry to post significant loss reserves.

Going forward, Fitch anticipates increased delinquencies and losses for the industry, including on average a 30% peak-to-trough decline in home prices nationally.

One factor offsetting increased losses, Fitch said, is an across-the-industry meaningful increase in claim denial, or rescission activity relating to fraudulent loans. Fitch expects "rescission activity will play a significant role in the MI industry's loss mitigation strategy over the short term, particularly with regard to the 2007 vintage and alt-A exposure," which allows for better loss control.

Fitch said the crisis has served as a catalyst for positive change in several fundamental aspects of the MI industry.

For instance, MI companies have implemented several more conservative underwriting changes "that will result in a more conservative credit profile, once the legacy portfolios' performance stabilizes," Fitch said, as well as pricing increases, such as the August 2008 price increase on all products by an average of 20%.

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