If you have ever bought a house and could not come up with the standard 20% down payment, you may know a thing or two about private mortgage insurance (PMI). In fact, you probably paid thousands of dollars during the first ten or fifteen years of your mortgage in premiums to buy the unfamiliar insurance.
Millions of homebuyers are required to have PMI, yet few folks know much about it. They know even less about the companies they are writing checks to each month.
So what is PMI? Who issues it? And what has the meltdown in the housing market done to these companies?
Basically, PMI is insurance that most mortgage lenders require homeowners to pay for until they have a 20% equity stake in their homes. If you only put 10% down at closing, you will be paying premiums until you reach the magical 20% mark.
It may take longer than you think. After all, during the first few years of your new mortgage, the majority of your payments go towards interest. It can take decades to accrue twenty or thirty thousand dollars of extra principle.
Although you are the one footing the bill, you are not the one the insurance protects. Instead, it protects your mortgage company. (Why they do not pay for it themselves is the subject of an entirely different, much more controversial article.) If you stop making payments, MGIC covers at least part of what you owe, if not the entire bill.
At least one survivor
There are several companies writing PMI policies, but the most prominent is MGIC Investment Corp. (NYSE:MTG). Serving more than 5,000 mortgage providers, MGIC owns the largest share of the PMI market. Right now, the company has over $220 billion of in-force insurance, with nearly $60 billion of risk in force. (The company re-insures the difference.)
Obviously, any company that has tried to insure this nation’s fragile real estate market has had a rough few years. As mortgage defaults rose, MGIC’s share price declined.
Since March of 2007, the number of delinquent loans on the company’s books rose by 68.5%. Its share price, during that same time, dropped from over $60 to under $3 today. That’s an incredible 18-month drop of 95%.
Obviously, the company is hurting. Its balance sheet has been destroyed and its ability to pay its obligations has been nearly destroyed. But MGIC is not bankrupt yet.
In fact, I think it will escape this crisis alive.
MGIC recently went to the capital markets in desperate need of funding. It found willing investors that paid out nearly $840 million to get their hands on equity stakes.
Internally, the company has been improving on everything it can.
MGIC raised premiums. It changed its underwriting guidelines. It eradicated its re-insurance business. And it increased its loss reserves.
The company is on the ropes, but with the help of a strong management team and an apparent bottom in the real estate market, its chances of survival look good.
Wall Street is going to have a tough time finding a reason to value this company any lower, which means value-minded investors should take a good look at the company.
There may be some fundamental flaws in the private mortgage insurance business, but there is nothing inherently wrong with MGIC’s business model. It has survived the worst of the crash and learned some incredibly hard lessons.
There is a good chance a hundred dollars or so out of your next monthly mortgage payment may go straight to MGIC. At least now, you know what you are buying.