Rating Agencies Pressure Insurers with Downgrades

A pair of rating agencies have taken a critical eye towards the companies that make up the private mortgage insurance business.

The report from Fitch Ratings placed its hardest hits on the four standalone mortgage insurers. It strongly makes the point that those in the mortgage insurance industry will need to raise substantial amounts of capital or risk suffering a ratings downgrade.

Meanwhile, Standard & Poor's credit analyst James Brender comments in his report that the company has concerns, not only about the troubled 2005 through 2007 vintages, but the 2008 book of business as well. He thinks this vintage could be unprofitable because of falling home prices and a high percentage of business with loan-to-value ratios over 95%.

In a subsequent conference call conducted by UBS, Mr. Brender elaborates these "superhigh" LTV loans are being booked at a time when house prices are still falling. For some MI companies, these loans were 40% of new insurance written. It shows a breakdown in risk management at some of the MIs.

It is because of the collapse of the piggyback market these loans are coming to the MIs, and the MIs should have taken an appropriate risk tolerance for this factor.

In the past this was true for other products as well. They need to come up with a process when new products come on the market to help determine appropriate risk tolerances.

Mr. Brender added that while the MIs would have to improve risk management procedures and raise capital, in his view the concentration on improving risk management was more important.

Back in November, S&P had a more optimistic view on how the MIs would manage through the crisis.

But the fourth-quarter result, especially in terms of the cure ratio and loss severity, caused a shift, Mr. Brender said.

Furthermore, it is incorrect to label this a subprime crisis; the MIs are seeing their losses based more on geography rather than credit score, he added.

In the Fitch report, only two of the MIs, Genworth Mortgage Insurance Co. and United Guaranty Residential Insurance Co. (part of American International Group) had their AA and AA+ insurer financial strength ratings respectfully, affirmed and their rating outlook at stable.

Republic Mortgage Insurance Corp. had its IFS rating of AA affirmed, but its ratings outlook was already on negative status.

CMG Mortgage Insurance Co., a joint venture between the PMI Group and CUNA Mutual Insurance Society, had its AA IFS affirmed but its ratings outlook cut from stable to negative.

As for the other four MIs, Triad appears to have been hit the hardest, not only by Fitch, but by Standard & Poor's as well.

Fitch placed the IFS and long-term issuer ratings of MGIC Investment Corp., the PMI Group and the Radian Group Inc. all on Ratings Watch Negative. Unless all three raise capital, MGIC and Radian could their IFS ratings cut by one notch and PMI by two notches.

But as for Triad, which was already on Ratings Watch Negative status, Fitch expressed extreme concern.

Triad currently has an IFS rating of AA-. Fitch said it believes the company's capital is well below the level needed to maintain that rating. Unless more capital is raised, Fitch is indicating it could lower Triad's ratings below the A category.

S&P, which has an AA financial strength rating for Triad, placed the MI on CreditWatch with negative implications. It said it "views Triad's exposure to loans with reduced documentation or potential for negative amortization as a higher risk tolerance than Standard & Poor's considers consistent with very strong ratings. Poor operating performance - coupled with recent growth in risk in force - could cause Triad's capitalization to deteriorate below a level acceptable for a AA- rated mortgage insurer."

When asked about the Fitch report, Triad issued a statement, which said, "We are in close contact with Fitch, the other rating agencies, the GSEs and our clients. We have been very transparent about our capital strength and the risk profile of our portfolio." (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/