Freddie Seeks MI Remediation Plans
Freddie Mac has ordered three more private mortgage insurers to come up with remediation plans following a downgrade by Standard & Poor's.
S&P downgraded the financial strength ratings on the mortgage insurance subsidiaries of MGIC Investment Corp., Milwaukee, and Radian Group Inc., Philadelphia, from AA- to A; The PMI Group Inc., Walnut Creek, Calif., from AA to A+; and Old Republic Corp., Chicago, from AA to AA-.
All but Old Republic, whose mortgage insurance subsidiary does business as Republic Mortgage Insurance Co., were ordered by Freddie Mac to develop remediation plans to maintain their status as Type I mortgage insurers. Back in February Freddie Mac implemented a new policy, which no longer automatically shifted Type I MIs to Type II when they received a downgrade.
Previously Triad Guaranty Inc. was ordered to come up with a remediation plan after Fitch (followed by Moody's and S&P) downgraded the financial strength rating to BBB.
A Freddie Mac spokesman said the downgrade on RMIC did not go through the AA- floor for Type I status and so its parent does not have to come up with a remediation plan.
The S&P report noted that more than 58% of the industry's flow market share in 2007 was written by companies whose financial strength ratings are below AA- and the other mortgage insurers (RMIC, Genworth and AIG United Guaranty) do not have the capital to absorb all the volume.
"The downgrades reflect weaker-than-expected results for the fourth quarter of 2007 and the continued deterioration in key variables that influence claims for mortgage insurance," explained S&P credit analyst James Brender.
Back in November, S&P noted if unemployment went above 6%, incurred losses for the MIs would be higher than expected. S&P now projects 5.8% unemployment for 2009.
Furthermore, its expectations of housing price declines have increased from a fall of 11% at the peak in 2006 to a fall of 20%.
It currently forecasts most MIs will not be profitable until 2010, at the earliest.
"Despite the challenging environment for mortgage insurers, there are some long-term positive factors for the industry," Mr. Brender added. "The most important of these is the rigor the industry has shown in reducing its exposure to higher risk products, such as mortgages with reduced documentation or high loan-to-value ratios or to properties in declining housing markets."
A note by Friedman Billings Ramsey analyst Steve Stelmach said, "The strong demand for mortgage insurance over the past nine months indicates that capacity is needed in the industry, whether that capacity is single-A or double-A rating. It certainly appears that GSEs are willing to give the mortgage insurers some latitude with regard to Type I Insurer status. Both of these issues should keep ample flow of new business headed toward the single-A players. That said, we do expect some shifts in market share between those that can remain double-A and those recently downgraded."
Fannie Mae declined to comment regarding the S&P downgrades.
MGIC chairman and chief executive Curt S. Culver said the company was disappointed with the actions of S&P but its "most important responsibility" to meet its claims obligations is best shown by its capital adequacy ratio, which is above S&P's minimum for an AAA rating.
Radian said it is in the process of submitting a plan to both Freddie Mac and Fannie Mae and has been in discussions with both.
It has also secured a waiver from the lenders of its credit facilities that suspends the ratings covenant. Radian is not in default currently it said, but was looking for temporary relief prospectively. It cannot borrow from the facility while the waiver is in effect.
"PMI has significant financial resources to pay insurance claims on defaulted loans, and we are a strong risk counterparty for our customers," said Steve Smith, chairman and chief executive of The PMI Group Inc. "The private mortgage insurance industry and PMI are going through challenging times as we navigate the current U.S. housing market. PMI's capital position and the resources we have available to pay claims have not been affected by S&P's ratings decisions."
Recent data from the Mortgage Insurance Companies of America show that the industry continues to face a rising claims to cures ratio, suggesting that default volume is growing.
In February, the industry reported 48,000 cures versus 61,000 new defaults on outstanding mortgage insurance policies by MICA members. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/