Executives
Bill Horning - VP of IR
Steve Smith - Chairman and CEO
Don Lofe - EVP, CFO and CAO
David Katkov - EVP and CBO
Analysts
Donna Halverstadt - Goldman Sachs
Mark Devries - Barclays Capital
Matthew Howlett - Macquarie Research Equities
Jordan Hammerlan - Philadelphia Financial
Bill Drew - Harbinger Capital
Sam Martini - ECI
Matthew Howlett - Macquarie
Steve Stelmach - FBR Capital Market
Chris Owens - Castlewood
PMI Group Inc. (PMI) Q2 2010 Earnings Call July 29, 2010 12:00 PM ET
Operator
Hello and welcome to the second quarter 2010 earnings call for the PMI Group. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instruction) Today’s call is being recorded. If you have any objections you may disconnect at this time.
Now I will turn the meeting over to Mr. Bill Horning, Vice President, Investor Relations. Sir, you may begin.
Bill Horning
Thank you operator and good morning and welcome to the PMI Group’s second quarter 2010 financial results conference call. Today’s call will begin with comments from Steve Smith, PMI’s Chairman and Chief Executive Office. Mr. Smith will discuss PMI’s overall financial results and highlights for the second quarter. Don Lofe, PMI’s Executive Vice President, Chief Financial Office and Chief Administration Officer will then address other business results for the quarter, as well as other financial and capital matters. We also have with us today David Katkov, PMI’s Executive Vic President and Chief Business Officer, who along with Steve and Don will be available to answer your questions following today’s prepared remarks.
Also on today’s we were referencing non-Generally Accepted Accounting Principle measures, such as net operating income, which under SEC Regulation G we are required to reconcile with GAAP. The reconciliations of these measures with GAAP financial measures are available on our website.
Before we begin, I would like to review the company’s Safe Harbor statement under the private securities litigation reform act of 1995. During this call, we will be making forward-looking statements. Actual results may differ materially from the statements made during this call. The company’s business depends on investment considerations, which are highlighted in our Securities and Exchange Commission filings, including our 2009 Form 10-K and most recent Form 10-Q. Forward-looking statements are made as of today, July 29th, 2010, and we undertake no obligation to update such statements except as may be required by law.
With that, I will turn the call over to PMI’s Chairman and Chief Executive Officer, Steve Smith.
Steve Smith
Thanks Bill. Good morning everyone and thank you for joining today’s call. In the second quarter the PMI Group had a net loss from continuing operations of $150.6 million or a loss of $1.11 per share. Our consolidated results for the second quarter driven by US mortgage insurance operations, which had a net loss of $115.6 million and in our corporate and other segment which had a $47.7 million loss as a result of an increase in the fair market value of debt due to our improving credit spreads.
Before reviewing the business in more detail, let me take a moment to discuss the mortgage insurance industry fundamentals. Most of you follow the mortgage insurance companies of America or MICA industry statistics that are reliefs on a one-month lag and have undoubtedly seen the improving cure ratios and the lower new notices of default.
Many of you also follow various government and housing statistics that show increasing loan work activity and modifications. We have experienced these same trends and, encouraged by the fundamentals, are generally moving in the right direction. With the peaking of some of the most troubled vintages, the number of new delinquent loans continued to decline in the second quarter. Peers remained elevated through the first half of 2010, relative to the prior two years.
With regards to new insurance written for the second quarter, our US MI operations saw an increase in new business production and market share compared to our private market competitors. It remains our expectation that private MI penetration, relative to FHA will increase over the next several years as we return to more historical norms.
US MI net loss was driven by continued high losses and associated Loss Adjustment Expenses or LAE. As Don will discuss, high level claim payments drove a reduction in loss reserves in the second quarter of 2010. That said several factors in the quarter partially offset this reduction.
In the second quarter, we received 28,597 new Notices of Default or NODs. NODs continue to negatively affect loss reserves. On the policy side however, this represents a decline in the NODs for the third straight quarter, the lowest NOD level since the fourth quarter of 2007, and a 25% decline from the second quarter of last year. In addition, the mix of NODs is improving. We received pure NODs from Alt-A, high loan-to-values and from the troubled geographic areas than in the prior quarter. As a result of the decline in NODs, higher claims paid and our loss mitigation efforts.
Primary loans in default at June 30, 2010, total 138,431, down from the 147,248 at March 31, 2010, and 150,925 at December 31st, 2009. Our primary delinquency rate at June 30, 2010, was 20.8%, down modestly from March 31st, 2010. But more importantly, the first decrease since the first quarter of 2007. While we anticipate adverse seasonality in the second half of the year, we continue to expect that PMI’s total primary default inventory at the end of 2010 will be lower than the year end 2009. This expectation derived my belief that defaults from troubled vintages have peaked.
Our continuing loss mitigation efforts are having a meaningful effect, and our projections for selling more claims in the second half of the year. PMI’s losses in the quarter were also affected by our rescission activity. By way of background, we investigate insured loans from misrepresentations, negligent underwriting and coverage ineligibility. When we find such deficiencies, we resent coverage on the loan pursuant to our master policy and refund all associated premiums.
In addition, when a claim is filed on a loan, but the loan file was not provided to us after repeated requests, the claim is denied. The aggregate dollar amount of delinquent, primary and pool risk in force resented or denied in the second quarter of 2010 was approximately $150 million.
While we have anticipated and said publicly that rescission activity would begin to decline in late 2010. The level of activity of the first half of 2010 was below our expectations. Accordingly, in the second quarter we reduced our estimate of future rescissions. To a lesser extent, we also reduced our expectations with respect to the level of future loan modifications. These reductions negatively impacted PMI’s loss reserves, which resulted in higher losses in LAE in the quarter.
Now let me take a few moments to discuss PMI’s loss mitigation efforts in more detail. As discussed on the first quarter conference call, delinquent borrowers are entering into workout programs sooner than in past periods, which has led to elevated workout activity. In the second quarter, loan modifications and payment plans enabled 11,491 PMI-insured borrowers representing approximately $542 million risk in force to retain their homes. Of those retentions, 3,485 loans representing approximately $188 million of risk in force were reported as HAMP modifications, while 5,113 were traditional nonHAMP loan modifications, representing approximately $230 million of risk in force. Both HAMP and nonHAMP modifications posted modest increases from the first quarter. Payment plans accounted for the remaining 2,893 borrowers and approximately $124 million of risk in force.
As of June 30th, 2010, 18,079 loans were in active HAMP trial period, compared to 27,303 loans as of March 31st, 2010. The decrease in active HAMP trial loans was due primarily to the change in required documentation to start the program and the treasuries mandate the servicers on seasoned trial loans that had not yet provided documentation.
Of the more than 18,000 loans now in HAMP trials, 15,048 of those loans where in our primary delinquent inventory at June 30, 2010. It is important keep in mind that generally HAMP is the first step in the servicers modification waterfall. So while a loan may enter a HAMP trial period, its ultimate disposition may be a traditional loan modification. Although the number and HAMP trial periods maybe declining, the number of loans in nonHAMP programs has remained strong, approximately 25% of our total delinquent loans were in HAMP or nonHAMP workout programs at the end of the second quarter.
Also let me remind you, the reporting lags still exist and therefore our loan modifications and trial plans and payment plan results are understated. In addition to our loan modification efforts, we able another 2,926 borrowers to avoid foreclosure through short sales and these [into a] foreclosure in the second quarter. Now let me briefly talk about new business writings. In the second quarter our US mortgage insurance operations were approximately $1.6 billion for new insurance written, an increase of 63% from the first quarter writings, but below the $2 billion in the second quarter of 2009. While we increased our writings in the second quarter, private MI penetrations remains low, limiting the amount of new insurance written, the industry can write. Several factors can influence the penetration rate, including the passage of the FHA reform bill authorizing FHA to increase pricing, the reduction or elimination of loan level pricing adjustments at the GSEs, as well as changes in home prices and economic conditions in MSAs where PMI and certain other MIs have restricted writings. Given the delay in FHA reform and the fact that any potential price adjustments are uncertain and outside of our control, we have revised our 2010 new insurance written target to between $7 billion and $10 billion. We believe that the upper end of this range is most likely achieved only in the event that in the near term FHAMI premiums increase, or the GSEs modify their loan level pricing adjustments.
At June 30 2010, our primary insurance in force total a $107.6 billion, our primary risk in force was $26.3 billion both were down modestly from the end of the first quarter. Pool risk at June 30 was $820 million, also down from the prior quarter. During the quarter PMI executed a restructuring of modified pool policies, effectively accelerating client payments to the counterparty on a discounted basis, resulting in the release of loss reserves. This restructuring reduced modified pool risk in force by approximately $73 million to $550 million. Additional information regarding PMI’s portfolio can be found in our semi-annual portfolio characteristic supplement, which was released today, and is available on our website.
Now I need to turn the call over to Don for addition details of the second quarter results as well as other capital and liquidity matters. Don.
Don Lofe
Thanks Steve, and good morning. With regard to our consolidated financial results, as Steve mentioned in his remark the reported loss operations from continuing operations for the second quarter of 2010 was a $1.11 per basic diluted share, and was primarily driven by incurred losses on our US mortgage insurance operation and a change in the fair value of the company’s debt. The loss associated with the increase in the fair value of debt due to improving credit spread resulted in approximate $48 million pre-tax negative effect to the second quarter result, while after tax loss of $0.23 per share, compared with a loss of approximately $39 million pre-tax in the second quarter of 2009. Over and after tax loss of $0.31 per share.
Now let me take a few moments to discuss the results of each segment in more detail. Within the US mortgage insurance operation, we had a net loss of $115.6 million in the second quarter 2010, compared to a net loss of $175.8 million in the second quarter of last year. Our second quarter results compared with the same period one year ago were primarily driven by lower incurred losses and other underwriting and operating expenses offset by lower premiums earned.
First let me address our reserves for losses in LAE at the end of the second quarter of 2010. The total decrease to gross reserve for losses during the second quarter was approximately $176 million. At June 30 2010, our gross reserve for losses and loss adjustment expenses stood at approximately $3.1 billion. As Steve discussed, we made adjustments to our loss reserve assumptions in the second quarter. Given the size of our loss reserves and volatility and uncertainty of many of the factors underlying our reserves, there could be further adjustments in future quarters. With the primary portfolio we decreased gross reserves by approximately $28 million from March 31 2010, due to a decrease in the primary default inventory, related to the decline in new notices of default, cures in the payment of claims.
Pool reserves decreased by approximately $147 million, due primarily to the modified pool restructuring payment. As Steve mentioned earlier, the restructuring of certain pool policies in the second quarter resulted in a reduction in pool risks in force of approximately $73 million for an agreed upon payment of approximately $57 million. PMI also retained the right to future premiums associated with the underlying pool contract, which had an estimated fair value at the date of recognition of $15.9 million. The amount of the payments to the counterparty, net of the fair value of the cash flow stream was $40.9 million. Total claims paid including loss adjustment expenses were $444.3 million for the second quarter, up from first quarter stake claims at $271 million. The increase from the first quarter was primarily driven by pool claims paid, including payments associated with the pool restructuring discussed this quarter as well as last quarter. With the first six months of 2010 total claims paid including LAE totals approximately $715 million compared with approximately $415 million for the same period one year ago. The increase versus the prior year is within our expectations of higher claims paid in 2010 as the delinquent loans worked away through the system.
Now let me explain how all these items affected our incurred losses in claim payments in the second quarter.
First, if you will turn to page 15 in our financial page supplement. You will see our loss reserve roll forward. The two primary categories are losses and LAE incurred at $321.1 million, which went through our income statement in the second quarter in claim payments of $444.3 million. With regard to our losses of $321.1 million, $215.5 million of that was attributable to incurred for the current year. This reflects primarily reserve established for our primary new notices of default and to much lesser extent, reserves for new pool notices of default received in the second quarter.
The $105.6 million of incurred for prior years reflects primarily the adjustments we made this quarter for the change in our estimates for future rescissions and to a lesser extent, the change in claim rate to report year 2009.
Now moving to our paid claims of $444.3 million, this includes approximately $275 million, our primary claims and approximately $157 million of full claims paid. The full claims paid include the net payment of $40.9 million for the pool restructuring completed in the second quarter, as well the actual claim payment of approximately $97 million for the pool restructuring done in the first quarter, for which we had already established loss reserves.
With regard to the statutory capital PMI Mortgage Insurance Company, it ended the second quarter with the risk to capital ratio of approximately $15.821 and excess minimum policy holder position of approximately $415.5 million.
Now moving to our international operations, the segment reported net income for the second quarter of 2010 of $4.6 million, compared to a net loss of $13.4 million in second quarter of last year. The net income for the quarter was driven by low incurred losses and operating expenses partially offset by lower premiums earned and foreign currency gains cash and cash equivalents held in the US dollars.
PMI Europe ended the second quarter with $1.9 billion of risk in force, down from $2.1 billion at March 31st, 2010, and $6.8 billion at June 30th, 2010. We hope for further reductions of risk in force in 2010 and 2011 will occur which would position PMI Europe to repatriate rate capital to the PMI Mortgage Insurance Company at some point in the future.
With regard to holding company matters, the PMI Group ended the second quarter with available cash and liquid investment of approximately $95 million the PMI Group, the holding company for the organization.
Let me update you on the value with a pledge note as well related to our sale of PMI Australia or what we refer to as the QBE note. As June 30th, 2010, the [notial] value of the QBE note was approximately $199 million, representing the original principal amount of $187 million plus the accruals interest since October 2008.
Assuming full payout of the note, we will realize at maturity in September 2011, $208 million which includes accrued interest. This note is currently off balance sheet asset due to the certain contingencies that are structured within the note. As you may recall, the amount we ultimately received in the QBE note is subject to the actual and projected loss performance of PMI’s authorized policies in force as of June 30th, 2008. We do not expect as of June 30th, 2010, that the ultimate projected losses on this portfolio will trigger any reduction in QBE note value.
Given the recent performance of the Australian housing market and the continued run-off for this portfolio and it’s seasoning, we expect full repayment of the note at maturity. Furthermore, related to QBE note, PMI Mortgage Insurance Company is party to an excess of loss reinsurance agreement in connection with the sale of PMI Australia. Upon maturity of the QBE note in September 2011, we except $25 million payment which would provide addition capital and liquidity to PMI Mortgage Insurance Company.
And finally, I’d like to direct those interested in a reconciliation of our consolidated net to our consolidated net operating loss to review the disclosure material posted on our website. As presented in the reconciliation on our website, our consolidated net operating loss in the second quarter 2010 was $120.6 million or loss of $0.89 per common share. With that, let’s open the call up for the questions. Operator?
Question-and-Answer Session
Operator
Thank you. (Operator Instructions) Our first comes from Miss Donna Halverstadt from Goldman Sachs. Your line is open.
Donna Halverstadt - Goldman Sachs
I had just three questions I wanted to run by you. One is on PMI Europe, which would you talked a little bit about, and since the first quarter of ’09 there pretty noticeable sequential declines in risk in force as well as claims paid. But I think that seemed to [have peaked] out a little bit this past quarter. There was just a slight sequential change in the risk in force. How should we think about, how quickly remaining risk in force declined what the potential loss exposure is? And specifically related you comment about repatriating capital. How low does risk in force have to go before repatriate capital, and how much would you be able to bring back?
Don Lofe
I don’t understand, let me try to take those questions here in and if I don’t get all the answers please ask again. Firstly on risk in force you are right, the majority of the sequential drop was from year end 12-31-2009 to 06-30-2010. The drop between March of this year and 06-30-2010 is primarily foreign currency effects, but there really wasn’t any affect of if you were calling or terminating any of that risk in force early. So that’s the first part. The second part is that concerning the run off if you will, or termination of that risk, that’s a matter of several functions what some of the contracts call for, and then as we said in our remarks, the opportunity to either terminate those or some form of restructuring. I really would not want to forecast as to how fast that would occur, but you might remember in our 10Q and K that we do give an essence for that as to when some of this runs off. I will indicate to you we do have one transaction and it is a large transaction that potentially calls in November of this year, but again all that is submit to finalization of terms and conditions. And then you’re third question was again about repatriation, how far does that have to go?
Donna Halverstadt - Goldman Sachs
Yes before you can bring capital back, and how much could you bring back?
Don Lofe
Well, with respect to that again, and I just want to clarify something I meant to say 2011 is the larger contract coming back, which gets to a part of your question. The Irish regulators we update them on a regular basis and they would have clearly a say in that. And so really it’s hard to indicate what exact level of risk in force they would be comfortable with. As I said my remarks we’d expect the earliest that would occur would be late in 2010 or in 2011. And we really just can’t predict the amount of repatriation. But obviously to your point, as that risk runs down in with the one large contract I’m referring to that would clearly assist us in that endeavor.
Donna Halverstadt - Goldman Sachs
Okay, thanks. Another thing I was wondering about, this quarter you showed the aging of your delinquent inventory which was interesting to take a look at. But one thing I found interesting and wasn’t quite sure what to think about it was the fact that for every quarter you show the 12 plus months delinquent bucket is a much lower percentage of the total than that of at least one of peers to the tune 7 to 9 points each quarter. Like I said I wasn’t quite sure how to think about that, do have any thoughts as to why your 12 plus month aged bucket would be a noticeably smaller percentage of total delinquencies than some others?
Steve Smith
Donna I really don’t have visibility into their portfolio, and how or what that real difference would be. So I really can’t answer that question to be honest with you. The number we’ve given you, you can see that the total mix over 4 and over 12 there has been some upward shift from quarter to quarter, but the total mix is about the same overall, so.
Donna Halverstadt - Goldman Sachs
Okay and the last question I had was about trends and average reserve to the primary delinquent loan. After going down noticeably from 6-30-09 to 9-30-09 its been trending back up in sequential quarters, and the most recent sequential increase was in terms of the dollar increase as well as the percentage increase was more than double what had been in previous sequential quarters. So, I was just wondering, how do you think we should think about that going forward? What sort of trend do you expect to see in terms of the average reserve per loan?
Steve Smith
Donna the average reserve per loan you know is very driven by the overall mix overall, and there is really a lack of total transparency in those numbers due to the growth in your portfolio, how people calculate delinquent loans, et cetera, what’s going on with your pool reserves, that’s a lot of things to get to mingle in that. So, I would say that we feel comfortable with the reserves slight increase in the reserve point OD that we indicated in the second quarter, but there are a lot of factors that could affect it in the second and in the third and fourth quarter of this year. So we are really not forecasting it.
Operator
Our next question comes from Mark Devries from Barclays Capital. You’re line is open
Mark Devries - Barclays Capital
Yes thanks. First question, by my calculation it looks like the average premium dropped a couple of basis points in the quarter, which seems a little bit surprising actually given that rescission activity is actually declining for the rest of headwind there from premium refunds. Could you give us a little sense of kind of what was driving that?
Don Lofe
Mark this is Don could you clarify your question a little bit, we want to make sure we understand what you mean by it?
Mark Devries - Barclays Capital
Yes, by my calculation it looks like the average premium fell about 2.5 basis points, and I guess one other point I was making is that, as you rescind at elevated levels and of course you’ve got a headwind there, but you are actually rescinding less if I would have thought there would have been always less pressure on the average. Are you just having more of your high premium business run off and what you’re writing is at the lower LPV, the lower premiums?
Don Lofe
You’ve actually just answered the question. Let me just restate it that the higher premium product is absolutely running off, burning out, so largely that would have been the all day books that you’re familiar with. And then the products we’re running today is roughly below 60 on terms of average premium.
Mark Devries - Barclays Capital
In March, you pointed about refunds. I mean they were still fairly consistent with the first quarter. It’s slightly elevated, so again there might be some noise in there with respect to that as well.
David Katkov
Yeah, I think the last point is, as you know, we’ve been very cautious about housing markets generally, there preponderance of our new business writings have been in the 90 LTV category as opposed to 95. That will also lower your average premium.
Mark Devries - Barclays Capital
And then, just want to clarify a point, Don, I think you made earlier. Were you saying that there is a potential for additional changes to assumptions behind the reserves such as the ones highlighted and their release around expectation for rescissions and expectations for a number of loan mods.
Don Lofe
That’s correct, Mark. And as we indicated both in Steve’s and my remarks that we look at the standalone each quarter and have to evaluate trends and conditions and other attributes that we see applicable to those quarters, and we are saying that we will have to evaluate those factors at each quarter and there could adjustments from future quarters relative to those matters.
Mark Devries - Barclays Capital
And finally, could you just give us some sense for why you believe rescission activities actually, on the first half of the year is coming in lower than you initially expected?
Steve Smith
Yeah, Mark, this is Steve. We had indicated in earlier reporting periods that we expected the policies that are under investigation to peak and we would expect a decrease in rescission activity generally towards the second half of the year, but that may have occurred and it appears to have occurred a little bit earlier than we expected. We will have to wait and see quite frankly, as the second quarter trend is in same, in third or fourth. It’s not certain that it will be, but we did see that trend in terms of the percent of closed files that ended up in a rescission or denial aggregate to be below our trends and so we made the adjustment appropriately.
Mark Devries - Barclays Capital
Have there been any changes to your approach that impacted that? No?
Steve Smith
No.
Operator
Our next question comes from Matthew Howlett from Macquarie. Your line is open.
Matthew Howlett - Macquarie Research Equities
Just on the seasonality, you said we expect to see NODs pick up due to seasonality. Can you quantify that any more, I mean cure ratio is a little over 100% here. Typically, you don’t see the seasonality really take it until December, and the January might come on. Did you see something in June and July like roll rates increasing that would suggest you were going to get a meaningful pickup? Or is it just going to be a few percentage points over the next few months with the exception of some in January?
Steve Smith
Matt, we’re not really projecting what that pickup will be for the second half of the year. I think what we’re suggesting is that you do see seasonality that’s traditional in the second half of the year. So letting the market know that very well could occur in the second half of this year. Also that could potentially be, but it’s uncertain, is that we clearly have seen peaking in their older books of business, as well as the mix of new NODs coming from some of the more problematic product segments or geographic. So, that could mitigate that somewhat, but it is traditional for the seasonality to have more NODs in the second half of this year and we are signaling that, that very well could be the case again this year.
Matthew Howlett - Macquarie Research Equities
That sounds more like the cautionary statement based on the seasonality. And just more on, my question on roll rates, you adjusted the reserves this quarter based on lower character mods and rescissions. In terms of roll rates, are you seeing any natural roll rates, anything this quarter that would have changed your initial assumptions? Or is it just again all due to less denials and less mod benefits?
Steve Smith
I think it’s the two items we’ve mentioned already, Matt.
Matthew Howlett - Macquarie Research Equities
Okay, great. Fair enough. Just wanted to clarify that. And then, the last question is house is meeting at 2 pm, the subcommittee, financial committee to talk on the role of private MI. I know you are not speaking, but anything you expect to come out of that?
David Katkov
Hi, this David Katkov. I actually think this is part of Congressman Kanjorski's a process for us, starting to redefine what the roll of various market participants should be in the future housing finance system. Honestly, in think the story for mortgage insurance is very good. I think the representative who will speak on behalf of MICA will have a good story to tell. We were one of the few industries I think that has proven our business model is extremely durable and is doing exactly what we were established to do. And I think that, that’s what you’ll hear this afternoon in the Congressman’s hearing.
Matthew Howlett - Macquarie Research Equities
And then with anticipated GSE reform, anything in terms of the changes in the mandate with MI? Could it go up? Could it go down? Could it go away? Any color so far in what you’ve heard from Washington?
Steve Smith
That it is way early in the process as you know, treasury put out of standing with seven questions for response and there were over four hundred different responses, and treasury and administration is waiting through at as we speak, you know, financial reform requires a plan to be offered in January next year. So, I think we are early in the process and way too early to predict.
Operator
Our next question comes from Jordan Hammerlan from Philadelphia Financial. Your line is open.
Jordan Hammerlan - Philadelphia Financial
Couple questions. First of all can you say the specific percentage of closing you anticipated to be rescinded before and now what you are assuming now?
Don Lofe
No, Jordan we really can’t comment on that.
Jordan Hammerlan - Philadelphia Financial
Okay. Second question, or if you can't say the number, can you say what percent change it was? Like 3% difference or something like that or you won't even go there?
Don Lofe
No we really don’t want to comment on that. In Stephen and my remarks we wanted to indicate the effects and that was a predominant effect we had to deal with.
Steve Smith
And Jordan Don gave you the total number in his comments of approximately $106 million, and he gave you a kind of an indication of how there was a higher balance towards the rescission percentage versus the modification percentage. So that’s really the guidance that we are giving you.
Jordan Hammerlan - Philadelphia Financial
As you look at the hearing today, the testimony is out and everybody is uniformly positive on the MI standards. One of the few times I've seen no one have a contra view that's presenting for a hearing. Given that's the case, when do you think is the earliest that the Senate I believe has to pass the bill? The House has already passed if reversed. But what is the earliest this could be passed and go into effect?
Steve Smith
Are you talking about FHA reforms Jordan?
Jordan Hammerlan - Philadelphia Financial
Yes, the bill that would increase the FHA premiums from 50 to 150 or they could increase it from 50 to 150 basis points.
David Katkov
Obviously I don’t have unique insight, but it is our understanding that potentially before the August recess that they will have sponsorship in the Senate, but I want to say that that is uncertain. Of course the next opportunity is in September, when they come back from recess and before they go out for the election cycle. And then I guess worst case is that it’s in a lame duck session, and I honestly don’t know how to handicap any of those. One thing I should mention too is just bear in mind that Commissioner Stevens today has the ability to increase price. I think this is something that’s not well understood in the marketplace, particularly at the upfront close and he currently is charging 225. He has statutory authority to go to 3, so again, we don’t have unique insight, but I think it is important to recognize he does have that ability, today.
Jordan Hammerlan - Philadelphia Financial
Okay. Final question, I don't know if you seen a good Morgan Stanley report out this morning that talks about potentially the federal government directly encouraging refinances for GSEs, helping to streamline that process. Would that be a direct benefit to your industry if more refinanced -- or would it be inside him directly, but it could help get rid of a lot of the delinquencies within your book.
Steve Smith
I haven’t seen the Morgan Stanley report that came out this morning Jordan, but clearly as you know there is a treasury program called HARP that is directed at that. And clearly with interest rates in the current environment being a 50 plus year lows that could very well be benefits for consumers to refinance those loans and take advantage of those programs. And obviously with interest rates at that level we are not expecting those rates to hold forever. We would think there would be general upward pressure in 2011and 2012 on those rates, so the persistency of those refits could be very important to the overall books of business. So we think now is a great time to take advantage of all of those programs if you are a homeowner, and I hope more will.
Operator
Our next question comes from Bill Drew from Harbinger Capital. Your line is open.
Bill Drew - Harbinger Capital
Hi. In the release you had mentioned that 2900 homeowners were able to avoid foreclosure through initiatives such as short sales. Are short sales something you are putting increased emphasis on going forward?
Steve Smith
No, we are not putting increased emphasis on them, although we do mitigate our loss on probably about 10% of those. But importantly, we also take inventory off of the market which helps stabilize those communities. So, it is favorable for us.
Bill Drew - Harbinger Capital
And how do the timelines from default to claim paid compare for short sales versus your typical default?
Steve Smith
Well they would obviously be shorter. It’s going to be a function of your mix and they are very different because of mix, various states have very different foreclosure periods in terms of judicial foreclosure processes, quicker foreclosure processes, you always have issues and potential for moratoriums in certain states. So it is very hard to predict that.
Operator
Our next question comes from Donna Halverstadt from Goldman Sachs. Your line is open.
Donna Halverstadt - Goldman Sachs
Thank you. I had one other follow-up on one of your comments. I think you said that you thought your market share was up during the quarter. What do you think your market share was?
David Katkov
Hi this David Katkov, yes it was up it was 12.5% for traditional market share.
Operator
Our next question comes from (inaudible). Your line is open.
Unidentified Analyst
Good afternoon and thank you for taking my call. I guess the first question I have is on the QB loan and I guess when that comes back on in September 2011, is that going to be like a gain or you’re just going to show the accrual of the interest and the rest is just cash returned?
Don Lofe
Ed, its Don. You are exactly right. It comes back of the gain because it's never been recognized if you will as the financial statement effect. You might remember that when we took the GAAP effect of the PMI Australia transaction that it went through discontinued operations and that comes as a loss. And so, when this comes back on to the book at its maturity, it would come back as a gain.
Unidentified Analyst
As a gain, okay. And then that will be for the principle plus interest?
Don Lofe
Yes, it would.
Unidentified Analyst
And then the next question I’m sure over the next couple of days you are probably going to ask about this a lot, but with the change in the rescission outlook, I guess, I was under the impression that there were some expectations that rescissions would reduce losses by about $1 billion or so. Now with this change, has that come down significantly or is there a new number I should be thinking about from the benefit?
Don Lofe
Ed, it is Don. Again, we really can’t comment any further on that. What Steve and I have said in our remarks again, the predominant effect of one of the material changes we talked about was the change in the rescission forecast and back to Jordan’s point again, we are not going to give an amount or a percentage but again, it is a predominant effect and we will evaluate that each quarter.
Unidentified Analyst
And I guess is there just less activity going on, does that changes that? I mean, you have a pool of loans that are delinquent in your life, we think these ones we are going to resent or deny all claims. And so I guess I just don’t know like in the couple of quarters, what are the attributes that changed that resulted in the downward revision?
Steve Smith
It’s purely a result Ed, of what the investigation pipeline that we talked about and we mentioned for a while, will peak and has been peaking. It has probably peaked a little earlier than we thought, this is point number one, and point number two is that looking at the quarter the percent of closed files under investigation it actually resulted in a rescission or denial was slightly below what we had expected for the quarter. I don’t know if that trend is going to hold or not, but we did recognized trend and reducing our rescission right for the quarter.
Unidentified Analyst
Okay. So, we could potentially in the next two quarters actually you could potentially close more and do a little bit of catch up for you or you’d just want to be a little bit conservative in front of the data you’ve seen?
Steve Smith
We’re not forecasting it for the third and fourth, we just certainly trying to give you the observation for the quarter.
Operator
Our next question comes from Sam Martini from ECI. Your line is open.
Sam Martini - ECI
Just two clarifications on that QBE note, did you guys say what would have to happen to impair that note in the next 12 months?
Don Lofe
We haven’t said on this call, but Sam, I can walk you through. This is Don. Firstly, there’s two components of that. We evaluate that note each quarter, and as I mentioned in my remark that we’ve continue to see if you will a positive effect in the economy in Australia and on going if you will stabilization of their economy and frankly much better than many parts of the world. And so, if in fact, you might remember that it’s tied to the 06/30/2008, on our premium reserve, and if in fact we saw and it’s tied to a 50% calculation of that reserve. And if we saw development if that was adverse, half that 50%, we’d have to evaluate that relative to what the note value would be. But again, it is not on our balance sheet. At this point in time, you might remember to use this collateral for the credit facility.
Sam Martini - ECI
Sure. Is there any sense though Don about how much that would, what would have to go wrong in the next 14 months to jeopardize that receipt?
Don Lofe
Sam, we haven’t given a specific effect for that, and as I said in my remarks and Steve has said it publicly as well, we do feel based when everything we know at 06/30/2010, we will collect the ultimate value of that note, and not see anything that would give us pause at this day.
Sam Martini - ECI
And I just had a clarification on just a general pool situation, the remaining pool risk and the pool paids. So, if I heard you right, there is 97 million paids from the Q1, a renegotiation of the contract? It just was paid in Q2?
Don Lofe
That’s correct. I would say the risk and reserve effect as of 3/31 and when the actual payment occurred in April.
Sam Martini - ECI
And then if we break the pool buckets and they are with deductible, without deductible and other pool remaining, we’ve got about 800 million remaining of total pool. How do you characterize the loss parameters of each of those buckets? If you were to look at, I mean your mod pool with deductible is down very materially with only 30 million of risk left in the ‘06, ‘07 vintage on 116 total remaining risk, and then your mod pool without deductible still has let’s say 184 million of risk in ‘06 and the entire other almost 250 million is prior to ‘06 and then you have the other pool of 300 million. If you were to walk me through and just say, here’s how we think about assessing the loss parameters with each bucket of risk. How do you think about it?
Steve Smith
Hi, this is Steve. The modified pool risk was the most volatile piece of our overall pool risk. And so that is now in the supplement we’ve given you, I think its like a $116 million of remaining debt risk in force it’s not reserved for. And we would expect that most of the volatility in that accrual has been mitigated due to the restructuring efforts this year as well as late last year relative to that book of business, but that was the most volatile segment. And Then in terms of potential volatility the second segment would be the remaining modified pool without deductible, but we don’t see it with the same level of volatility as the modified pool deductible. And then the other segment would be last in that pecking order if you will.
Sam Martini - ECI
That other pool remaining is seasoned at this point?
Steve Smith
Yes.
Sam Martini - ECI
So basically, you would expect paids out of the pool losses to normalize. Not to jump all over the place from 20 to 150 to the 120. It's going to be more normal based on delinquencies received, processed and paid.
Steve Smith
Yes I think that’s right. Look we had a large paid number for pool in the first half of this year. I don’t think it would be accurate to normalize that run rate.
Don Lofe
And for those of you on the call and to Sam’s question. Steve and I are referring to pages 31 and 32 in our financial supplement and really we hope gives a good amount of detail relative to modify pool, and then as was pointed out you have other pools as well.
Operator
Our next question comes from Matthew Howlett from Macquarie. Your line is open.
Matthew Howlett - Macquarie
Thank you for taking my call. On the HAMP, Treasury is reporting that basically there is a 45% pull through rate on the HAMP trials. And then they are saying basically a 50% pull through rate on what sales with less than 10% actually going to foreclosure. Is that what your experience is? And then two, if we see some late stage -- the HAMP trial, the ones that fail, they cure out in the second half of the year, could that potentially take down the average reserve per delinquency.
Steve Smith
Let me think about it in a couple different ways. There is a lot on that treasury data I’m not sure I’m going to answer your question exactly, but relative to the HAMPs, in terms of average to date started and the ones that will pull through, what was the number that you quoted for treasury on that?
Matthew Howlett - Macquarie
40.
Steve Smith
40. Now that would be consistent, and possibly be slightly higher than that. But remember that they also have another statistic that the ones that or cancelled about 45% of those ended up in a nontraditional modification. We also see similar patterns relative to our cures, which is why we breakout the HAMP modes retention workouts. The nonHAMP as well as the payment plans, just try to give you more visibility into the overall trends because the overall level are significantly greater than HAMP as a segment of them.
Matthew Howlett - Macquarie
If we see more nonHAMP mods in the back half of the year or going forward, would I be right to presume those are beyond your later stage delinquencies, the ones that have failed the HAMP trial, they are going to the alternative program and where you have more reserve for delinquent against?
Steve Smith
Well look, as you go through the waterfall the first step typically has been HAMP. We haven't broken it out the way you are asking the question, but it would be logical to assume that the HAMP waterfall was first. And if in fact those percentages go down the others may be going up. So I think that logic would hold.
Matthew Howlett – Macquarie
Okay. Great. And clarify 25% of what you know are -- of your delinquent inventories are either HAMP and nonHAMP presently.
Steve Smith
Yes, 25% of our delinquent inventory at 630 are in some form of workout retention program.
Operator
Our next question comes from Steve Stelmach from FBR Capital Market.
Steve Stelmach - FBR Capital Market
Good morning. Just real quick follow-up on the rescission issue. Since the capital rates, have you seen any change in behavior on the part of the servicers or lenders in terms of their negotiating over potential rescissions?
Steve Smith
No. I don’t think there is any general trend that we could comment on.
Steve Stelmach - FBR Capital Market
So when will stats grow this year versus last? And your willingness perhaps to even negotiate on the recessions hasn’t change?
Steve Smith
We haven’t seen a trend difference in that regard this year.
Operator
Our next question comes from Chris Owens from Castlewood. Your line is open.
Chris Owens - Castlewood
My question is for the 25% of your delinquencies that are in modifications, is that -- I get to 35,000 total modifications. Is that number up or down quarter over quarter?
Steve Smith
The percent is down slightly from the first quarter of delinquent loans in some form of workout program. So the 25% of total delinquent loans that are in some form of workout program are down slightly from the first quarter, if that’s the question.
Chris Owens - Castlewood
Okay. On an absolute number it could be flattish.
Steve Smith
No, the absolute number would be down slightly as well because our ending inventories down.
Chris Owens - Castlewood
Okay. And then when modification goes to cure, where is it curing from? What delinquency stage on average?
David Katkov
This is David Katkov. This is going to be 150 plus, the more seriously delinquent.
Chris Owens - Castlewood
What level of reserve is typically associated with 150 day plus?
Don Lofe
Chris, this is Don. We really don't comment on that. And again we look at every puck as we talked about on prior calls, but we don't disclose that number.
Chris Owens - Castlewood
Okay. And you guys also don't disclose what you expect for modifications to go to cure status, so that 25% you won't disclose what you expect in cure?
Don Lofe
No. We have not disclosed that in the past and Steve said, we were just not going to forecast right now, we are really just trying to give what we're seeing for this quarter and for trends that we had to recognize for the quarter.
Steve Smith
Some of the [foregoings] are still in development as you know and they are still early. These programs started in the first half of 2009, so to have clear trends that we can definitely show you it would be pretty mature, I mean we’ll certainly track the data, we are cognizant of the trends, but forecasting them, we haven’t going into that point at this stage.
Chris Owens - Castlewood
But you do book the benefit, a go forward benefit in your reserving, right?
Steve Smith
We do.
Don Lofe
That’s correct.
Chris Owens - Castlewood
Okay. So, you want a disclosure but you are booking at benefit for it. And then I guess just sort of stepping back, what needs to happen in terms of delinquencies in aging and for you guys to report like just a range for [AA]. So you guys are reporting an operating profit? I mean what does the book look like in that scenario?
Don Lofe
Chris, it’s Don again. Just unfortunately we are not in a position to gauge forecast and forecasted matters.
Operator
(Operator Instructions) There are no further questions. I will now turn the call back to Mr. Bill Horning for closing remarks.
Bill Horning
Thanks operator. This concludes our question-and-answer portion of our conference call. Thank you for joining us on today’s call, and as always, we thank you for your ownership and interest in the PMI Group.
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