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Radian, MGIC Must Fill Capital Gap Under Fannie-Freddie Plan

JUL 11, 2014 10:46am ET
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Radian Group Inc. and MGIC Investment Corp. are among mortgage insurers that would need to fill a financial gap under new financial-strength rules proposed by the Federal Housing Finance Agency. The stocks dropped in New York trading.

Radian said it would need about $850 million to meet the standard now and expects to be able to comply within a two-year transition period allowed under the rules. Milwaukee-based MGIC didn't provide a figure and said it faced a "material shortfall." Genworth Financial Inc. said yesterday that it may need as much as $550 million at its mortgage insurer by June 30, 2015, to meet the standards.

U.S. regulators are seeking to stiffen standards for mortgage insurers that back loans sold to Fannie Mae and Freddie Mac to prevent a repeat of the losses the government-backed firms faced in the 2008 financial crisis. Radian and MGIC said the rules are too stringent and could make it more difficult for borrowers to afford homes.

"These guidelines create capital requirements that have the potential of shrinking access to the very segments of borrowers that we believe the government wants to expand homeownership for," Radian Chief Executive Officer S.A. Ibrahim said in an interview. "They are going to be worst hit from this, one way or the other."

Radian, MGIC and Genworth said they have ways to meet the higher asset levels, which may change in a final version of the rules. The companies cited strategies such as seeking reinsurance, selling assets, raising funds in the market or moving cash from other parts of their businesses.

"We have at Radian the ability to meet these requirements, even as stated, without the need to raise capital," Ibrahim said.

The rules are more onerous for MGIC, because the company backs more delinquent and older loans than rivals, according to Eric Beardsley, an analyst at Goldman Sachs Group Inc. He removed the stock from his "Conviction List" today. Beardsley said the companies may need to raise prices, which could pressure sales.

MGIC fell 9.3% to $8.38 at 9:35 a.m. Richmond, Va.-based Genworth, which also sells life insurance and long-term care coverage, slumped 5.7%. Radian, based in Philadelphia, dropped 4%.

The proposed rules are tighter than expected, particularly in their treatment of riskier borrowers, Jack Micenko, an analyst at Susquehanna International Group, said in a research note today.

"The proposal is more onerous than we expected, and we believe if finalized under current form, would hurt the recovery in housing by limiting credit expansion," he wrote. "We expect final rules to be less limiting than what was put forth yesterday. Realtors, lenders and builder trade groups are powerful lobbies."

The companies have already turned to the capital markets to raise funds, so they can sell more coverage as home sales recover. Billionaire John Paulson is among the biggest equity investors in Radian, Milwaukee-based MGIC and Genworth. George Soros and Kyle Bass are among backers of rival firms.

To back loans packaged into securities by the U.S.-owned mortgage-finance giants, insurers would have to hold liquid assets worth at least 5.6% of their risk exposure, under the Federal Housing Finance Agency proposal. That compares with about 4% under existing state-based rules that use a broader definition of capital. The new rules require holding more assets against riskier loans, such as to borrowers with lower credit scores.

"Mortgage insurance counterparties must be able to fulfill their intended role of providing private capital, even in adverse market conditions," FHFA Director Mel Watt said in an emailed statement.

The rules "require mortgage insurers to hold unnecessarily excessive assets with potential adverse effects on creditworthy borrowers and housing policy," MGIC said in a statement yesterday.

Mortgage insurers now face 25-to-1 risk-to-capital limits from some state regulators. The new rules would require Radian to hold resources equivalent to a ratio of about 12-to-1 over time, Radian Chief Risk Officer Derek Brummer said on a conference call with analysts yesterday.

The proposal is the result of a years-long effort to rewrite the rules after Fannie Mae and Freddie Mac suffered losses when mortgage-insurance companies weren’t able to meet their obligations after the housing bubble burst. During the housing crash, about half the mortgage-insurance industry was pushed out of the business.

Fannie Mae and Freddie Mac have been under orders from their regulator to reduce their counterparty risk since they were seized by the federal government as they neared bankruptcy in 2008. They required $187.5 billion in taxpayer funds to stay afloat before they began posting record profits as the housing market recovered.

The guarantees provided by the two companies are separate from mortgage insurance, which cover losses when homeowners default and foreclosures fail to recoup costs.

American International Group Inc.'s United Guaranty Corp., the largest seller of the coverage, said it supports efforts to bolster confidence in Fannie Mae and Freddie Mac. AIG, which mostly sells property-casualty coverage and life insurance, slipped 0.6%.

Arch Capital Group Ltd. and Essent Group Ltd., which began selling coverage after the crisis, said in statements that they would be in compliance if the new rules took effect immediately. Another new firm, NMI Holdings Inc., said the rules are "a step in the right direction," and that it will be "well positioned" to meet the standards.

The proposals were developed by Fannie Mae and Freddie Mac in consultation with state insurance regulators and the mortgage insurers themselves. The rules are now open for a 60-day comment period, and the final version will become effective 180 days after they’re published.

 

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