Incoming CEO's Challenge at MGIC: Grow Under New Constraints
Patrick Sinks is taking the reins at MGIC Investment Corp. at a pivotal moment, as the mortgage insurer faces tougher capital standards and a more competitive field where his company is no longer No. 1.
The survival of the private mortgage insurance industry is no longer in doubt, as it was in the aftermath of the housing crash. Growth remains a challenge, however, with the secondary market giants Fannie Mae and Freddie Mac and their regulator seeking higher capital requirements for the insurers.
Now the talk is "about what role we can play in the market, as opposed to 'do you have a role at all,'" said Sinks.
The company is competing for lenders' business with the three remaining legacy players and three newcomers. Since the downturn ended, MGIC's market share of new insurance written has slipped and the company is now No. 3 on this score, behind Radian and United Guaranty. MGIC also dropped to No. 2 in insurance-in-force behind Radian.
Meanwhile, new players Essent and National MI have grabbed market share. To boot, Arch MI is now writing policies for the broader market; in its previous incarnation it only did business with credit unions.
Sinks will step into his new job on March 1, succeeding Curt Culver, who is staying on as non-executive chairman. Sinks will also replace Culver as president and CEO of the company's main subsidiary, Mortgage Guaranty Insurance Corp. He is currently president and chief operating officer of both firms, a job he assumed in 2006.
Sinks has been with the mortgage insurer since 1978. Prior to his current role, he was an executive vice president of field operations and a senior vice president, controller and chief accounting officer.
The goal of the Federal Housing Finance Agency proposal is laudable, he said. The agency wants Fannie Mae and Freddie Mac's largest counterparties to each have a sound financial base.
"That makes a lot of sense. We've been supportive of the manner in which they did it," Sinks commented. "They've gone from a bright line to more risk-based rules. We think that is a good idea." However, "we think they've overshot the mark a little bit."
Under the current FHFA proposal, which is open for public comment, MGIC would have a $600 million capital shortfall. But the company said it would be able to meet the capital requirements by the time the rule took effect in 2017.
While all private mortgage insurers should be able to take advantage of future growth opportunities, the proposed government-sponsored enterprise mortgage insurer eligibility requirements "have the potential to limit access to credit and to perhaps increase the cost of housing," Sinks said.
The new rules could stall the MI industry's efforts at regaining market share from the Federal Housing Administration's insurance program. For low down payment borrowers across the credit spectrum, getting private mortgage insurance is cheaper than going through the FHA program, Sinks said.
But under the proposal, the amount of capital that the Federal Housing Finance Agency is asking the MIs to hold to cover loans with lower credit scores is more severe than the industry would like.
"That may very well drive business back to the FHA," Sinks said. "We don't think that is a good outcome for anybody."
The government has been seeking a return of private capital to the mortgage industry and the mortgage insurers have said they are willing to fill that role.
During the mortgage crisis, some observers doubted there was a future for MGIC. Investors dumped the company's stock; over 53 million shares were sold on Aug. 2, 2012 and during trading the next day, the price bottomed out at 66 cents a share.
But the company was always able to pay its claims, which was the most important factor for its customers and the GSEs, Sinks said. It was also able to raise capital three times.
Last year, MGIC raised $1.2 billion through debt and equity offerings, which Sinks said secured the company's viability.
MGIC also adopted conservative underwriting guidelines during the bust. That is one reason it has lost market share to Radian and United Guaranty.
Radian and UG aggressively marketed single premium programs during the period as well. At the time, MGIC pulled back from this product because the company felt it did not generate adequate returns.
While MGIC is not being aggressive in its pricing, it has loosened the reins a bit and regained market share over the last three to four quarters, Sinks said.
Its market share of new policies written was in the area of 23% to 24% before the crisis; it fell to 16.5% at its lowest point. Now it is 18.5%.
Now MGIC is selectively offering single premium products to markets it feels will generate the right returns.
MGIC has not sacrificed credit quality to regain market share, Sinks said. While it has to remain competitive, MGIC's objective is to be there for the long term and "rebuild market share prudently."
The tenure of its sales force gives MGIC the benefit of long-standing relationships with its mortgage lender customers. "As the doubt was removed about MGIC, they turned back to MGIC and we're growing share once again," Sinks said.
"We believe that we have to win on the customer service level. You can't compete on price in the long term. We want to be there when the customer needs us."
There is one other challenge taking the top job at MGIC for Sinks. He will be occupying the seat once held by Max Karl, the inventor of the modern-day private mortgage insurance business, who founded the company in 1957.
After getting the news of his promotion, "I made the point to our board that it is not lost on me that the CEO position at MGIC is a special position because this is a special company.
"Not only I am following Curt Culver [CEO since 2000], I am following Bill Lacy [1987-1999] and I am following Max Karl. I am hoping I can live up to that kind of legacy," he said.