Radian Bets on Private-Label MBS Market Rebirth in Clayton Deal
By agreeing to buy Clayton Holdings for $305 million, Radian Group is essentially betting that the private mortgage securitization market will make a comeback.
Clayton provides outsourced services such as loan reviews and due diligence for mortgage-backed securities deals—demand for which would presumably pick up if private issuance takes off again. S.A. Ibrahim, Radian's chief executive, figures it's only a matter of time before that rebound happens.
"Banks will try and relieve capital pressure" by turning to private label securitizations of loans held in their portfolios, Ibrahim said Wednesday on a conference call with investors and analysts. This is one of the reasons Radian believes the private-label MBS market will grow, although not to the levels seen before the crisis.
Even with fewer or smaller deals, quality control should be in hot demand as memories of the mortgage crisis linger, Radian reckons. Clayton, after all, is the firm whose former president revealed glaring risk-management lapses in the bubble-era securitization process to the Financial Crisis Inquiry Commission in 2010.
The new pools are likely to have due diligence requirements that are "much more extensive, where a much larger number of loans, whether it's 100% or something just less than that, have to be reviewed in order for a deal to go forward," said Teresa Bryce Bazemore, the president of Radian Guaranty, the company's flagship mortgage insurance unit. "So we think that the securitization market doesn't have to get back to the levels that it had been before in order for Clayton to benefit."
The deal comes as Radian faces a new competitive landscape in its core business. Over the past few years, the Philadelphia mortgage insurer has been aggressive in adding new lender customers. It finished 2013 as the industry's largest company in insurance in force, and second by new insurance written, according to MortgageStats.com.
But since the crisis Essent (which is now a close fifth in new insurance written behind legacy insurer Genworth), National MI and Arch US MI have entered the fray.
"We did see some shift in the market share from the third quarter of last year until now. That's one of the reasons why we continue to be very focused on bringing on new customers," Bazemore said.
Adding Clayton is "another way that we differentiate ourselves from our mortgage insurance competitors," Ibrahim said. Radian is "positioning ourselves for what we believe is the next opportunity in the future of the housing finance system in an area where we have already started doing things, to a small extent, on our own."
Clayton, based in Shelton, Conn., also offers servicing surveillance and foreclosed-property services, which would provide additional revenue streams to complement Radian's core private mortgage insurance business.
"While the significant upside opportunities from the acquisition depend on many things, including the growth of the private securitization market, Clayton is already a strong and successful company on a standalone basis," Ibrahim said.
Radian also sees opportunities to market Clayton's services to its lender clients.
"We think there is an opportunity, given the services that Clayton provides, to market those services in a cross-sell way, using our sales force, and so we've been thinking about, how do we package those services so that our sales force can introduce them?" said Bazemore.
In servicing surveillance, for example, Radian "had started looking at how do we get on top of how loans were being serviced, and we found that some of our customers were interested in accessing that service, that capability, and Clayton provides us that," Ibrahim said.
Radian has a much larger client roster than Clayton has. Only a small amount of Clayton's revenue comes from Radian's competitors in the mortgage insurance business.
Like the other three surviving boom-era mortgage insurers, Radian has been working on clearing from its books the legacy business that has affected the company's finances over the past few years.
Getting the Clayton deal done "will not distract or compromise our focus" on Radian Guaranty, Ibrahim said.
Radian made $203 million in the first quarter, of which $51 million came from fair market valuation adjustments on its investments and $65 million from investment income.
The company said on the call it has asked the New York Department of Financial Services for permission to make an extraordinary dividend payment at a unit called Radian Asset Assurance. Those funds would then be contributed to Radian Guaranty.
The company would not disclose the size of the proposed dividend. "But one way to get a general perspective on it is that our ordinary dividend this year would have been within the range of $30 million, approximately, and you can assume that this request is materially in excess of that," said Radian Asset Assurance President David Beldler.
The unit, a financial guarantee company, has been operating in run-off for the past several years. During that time, dividends from Radian Asset Assurance have been used to boost Radian Guaranty’s capital. Radian Asset Assurance now has excess capital, because the amount of risk on its books has decreased.
To pay for Clayton, as well as repay debt due in 2015, Radian is selling 15.5 million shares of its common stock plus $200 million in debt. The newly issued debt would come due in 2019. The acquisition is expected to close this summer.