Hedge funds led by billionaire John Paulson, Lee Ainslie, George Soros, Richard Perry and John Griffin are buying mortgage insurers to play the housing rebound. The mortgage insurers were the hardest hit during the housing crisis and the hedge fund trade is that they will be the strongest performers as housing rebounds. Mortgage insurers are in the business of covering losses when homeowners default and foreclosures fail to recoup the value of the mortgage.
The two stocks in this sector seeing the biggest buying by these billionaires are MGIC Investment (MTG) and Radian Group (RDN). In MGIC Investment Lee Ainslie's Maverick Capital is the largest holder with almost 23.6 million, followed by Paulson & Co. with 17 million shares, Blue Ridge Capital with just under 15 million shares (see Griffin's under-the-radar stocks), Perry Corporation at just under 9 million shares, and Soros has 2.8 million shares (check out Soros' big bets). John Paulson also owns 11.5 million shares of Radian Group (check out Paulson's latest buys).
Paulson's investment in the mortgage market is known to have been successful in the past. No one made more during the housing collapse than John Paulson. His firm profited from the downturn by betting on sub prime mortgages. It is estimated that he personally made $15 billion from his sub prime short. Even thou Paulson has a mixed track record with his other investments, most notably a massive long position in Gold (GLD), his track record on housing is second to none. In his letter to clients, Paulson said:
Mortgage insurers are all experiencing improving fundamentals, as their performance is tied to the housing recovery, and should offer considerable upside if recent positive housing trends continue. Certain types of insurance companies are currently trading at low relative valuations and should offer considerable upside.
Right now insuring mortgages is a very good business to be in. Home prices are rising and defaults are down across all major markets. MGIC Investment and Radian Group are two of the few remaining publicly traded mortgage insurers. Both received a waiver from the federal government during the housing crisis to continue issuing new coverage. Losses forced other companies from the business entirely. According to Keefe Bruyette & Woods analyst Bose George:
The mortgage insurance sector is a very good business right now. You're getting high returns in the high teens and there are barriers to entry. People are looking for names that are still very exposed to improvements in home prices and improvements in mortgage credit over the next few years. If you believe in a very strong recovery, the insurers remain the best way to invest.
On the April 30 conference call with analysts, MGIC Investment CEO Curt Culver said:
Our strengthened financial condition puts us in a position to regain market share. Returns on the new business are very strong and should continue to be so given the outstanding credit quality of the business.
Only Real Competitor
The only competitor left for the private mortgage insurers is the federal government and the Federal Home Loan Mortgage Corporation (OTCQB:FMCC), or Freddie Mac. Luckily for the private insurers, there is political pressure to scale back Freddie Mac's business operations. In the first quarter of this year, the federal government accounted for 67% of the mortgage insurance market. That is down from 74% in the first quarter of last year. In comparison, sales of private mortgage insurance jumped 78% in the first quarter of this year from 2012. As Freddie Mac continues to scale back, sales gains in the private mortgage insurance market will continue and benefit private mortgage insurers like MGIC Investment and Radian Group.
As long as the housing market continues to recover, private mortgage insurers like MGIC Investment and Radian Group will continue to perform well. As recently as 2010, Radian was trading above $18 and MGIC above $13. A move back to those levels would be a 50% return for Radian shareholders and a 100% return for MGIC shareholders. The dynamics of the housing market look better now than they did in 2010. I think it's good bet we'll see prices back at those levels in the next two years.