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S&P: Mortgage Insurers Face More Challenges

Standard & Poor's Ratings Services reinstated the negative outlook and downgraded some of the country's largest insurers while anticipating U.S. mortgage insurers "have limited opportunities for long-term growth and diversification."

S&P rated Republic International Corp. A- from A while counterparty credit and financial strength ratings on the company core subsidiaries changed to A+ from AA-. Therefore, S&P said, the outlook on RIC is negative.

The rating agency also placed PMI Group Inc. on CreditWatch with negative implications for 30 days, noting it "will likely either lower the ratings another notch or affirm them and assign a negative outlook."

S&P lowered its counterparty credit rating on PMI Group Inc. to BBB- from BBB+ and its counterparty credit and financial strength ratings on PMI Group's mortgage insurance subsidiaries in the U.S. and Europe to A- from A+.

Yet another insurer placed on outlook negative is Radian Group Inc. S&P lowered its counterparty credit rating on Radian Group Inc. to BB+ from BBB and its counterparty credit and financial strength ratings on Radian Group's mortgage insurance subsidiaries to BBB+ from A.

The rating concludes the CreditWatch with negative implications Radian Group was placed on since Feb. 13, 2008. The ratings agency said it has removed these ratings from CreditWatch with negative implications and placed on outlook negative.

However, not all insurer ratings changed for the worse while they remain on outlook negative.

S&P affirmed its AA counterparty credit and financial strength ratings on Genworth Financial Inc.'s core mortgage insurance subsidiaries.

The ratings agency affirmed its BBB counterparty credit rating on MGIC Investment Corp. and its A counterparty credit and financial strength ratings on the mortgage insurance subsidiaries including MGIC Australia Pty Ltd. Both Genworth and MGIC remain on outlook negative.

S&P reported the downgrades reflect its "expectations for further deterioration in key variables that influence claims, our reassessment of the long-term fundamentals of the mortgage insurance industry, our concerns about the profitability of insured mortgages originated in 2008, and our comparisons of firms' actual results for the first half of 2008 with our forecasts."

Earlier this year, on April 8, when S&P made ratings actions on several mortgage insurers, its stated forecast for the peak-to-trough decline in the S&P/Case-Shiller Home Price Index was 20%. Now, S&P said it expects the index to decline 29%.

Economic factors affecting the outlook include unemployment. For example, if the unemployment rate was less than 5% when the housing markets first showed signs of deterioration, S&P said, at the end of July it increased to 5.7%, and is expected to rise above 6.2% in 2009. S&P stressed it has highlighted "higher unemployment as a potential driver of significantly greater claims for mortgage insurance" throughout the disruption in the housing markets.

S&P re-examined the U.S. mortgage insurance industry's long-term fundamentals and concluded, "The industry's competitive position, operating performance and enterprise risk management practices are more consistent with the lower end of the A category."

Furthermore, "As in any industry, we view some companies as having greater financial strength than others, so a distribution of ratings is appropriate. Nothing precludes a U.S. mortgage insurer from being rated in the AA category, but for that to happen, it would have to distinguish itself materially from most of its peers," S&P said.

The rating agency maintains its "more pessimistic" assessment of the sector reflects its opinion that U.S. mortgage insurers have limited long-term opportunities.

The insurers market is strongly affected by lenders, Fannie Mae and Freddie Mac. However, S&P said, these much larger counterparties "have historically been able to implement initiatives that either weaken mortgage insurers' profitability or raise their risk tolerances."

S&P stressed that mortgage insurers often face consequences deriving from their exposure "to unprofitable loans long after the disruption in the housing markets indicate most firms' ERM practices are adequate, which is the second lowest of Standard & Poor's four designations for ERM."

The ratings agency also highlights the fact that its projected claims for the 2006 and 2007 vintages "indicate the volatility of mortgage insurers' operating results is significantly greater" than what S&P assumed before the deterioration in the mortgage and housing markets.

Furthermore, "operating losses have become so significant that they have had a material impact on some companies' capitalization and financial flexibility."

S&P expects the 2008 vintage will generate moderate underwriting profit for most mortgage insurers even though uncertainty in the mortgage and housing markets "coupled with unfavorable data on early payment defaults" suggest underwriting losses are a possibility.

The agency said it increased the estimate of the claim rate for the 2008 vintage to 7% from 6.5% based on the assumption the initial performance of loans originated in the first quarter of 2008 reflects commitments for loans originated before mortgage insurers implemented more restrictive guidelines.

"If those guidelines do not improve credit quality, the claim rate will likely be greater than 7%. Even with solid credit quality, insured loans originated in 2008 face a difficult combination of falling home prices and loan-to-value ratios that are still above 90%." (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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