Mortgage Insurers: The Next Shoe to Drop?

At the end of 2007, mortgage insurer MGIC (MTG) had $212 billion of insurance in force. And it's not performing well: in the fourth quarter alone its claims reached $1.3 billion. The value of the entire company, according to the stock market, is about $1.4 billion, and falling - its shares are down more than 75% from their 52-week high.

In such a context, it would hardly be surprising if MGIC's customers are a little bit wary about relying on it for mortgage insurance. The only reason to buy insurance off anybody is if you're quite sure that the insurer is going to be able to pay out in the event of a claim. And given what's happening to the monolines, insurer counterparty risk is top of everybody's mind right now. Besides, people only take out mortgage insurance when they take out a mortgage, and that activity has slowed dramatically as the housing market has slumped.

But the crazy thing is that MGIC and its fellow mortgage insurers are doing brisker business than ever.

Even as losses mount, mortgage insurers' sales are climbing as lenders require more borrowers to buy the coverage. The association's members wrote 141,588 policies for homeowners last month, up 57 percent from a year earlier.

I think what we're seeing here is true desperation on the part of the lenders. Their underwriting muscles have atrophied for lack of use: while they'd like to be able to simply unilaterally beef up their underwriting, they have little faith in their ability to do so. So they plump for the next best thing: getting their mortgage payments guaranteed by an insurance company, passing the underwriting buck along the chain to someone else.

And the insurers' underwriters? Are they confident that they're doing their job better now than they were a year ago, even in the face of a sharp spike in applications for new policies? I'm not.

If there's one thing we learned from the 2007 subprime mortgage vintage, it's that the mortgage industry is a tanker which is very hard to turn around. If mortgage insurers are writing more policies than ever, my guess is that they're writing more bad policies than ever. If the monolines collapse, the mortgage insurers could be next.

Comments

[slickvguy]

"If mortgage insurers are writing more policies than ever, my guess is that they're writing more bad policies than ever."

Is this what passes for intelligent comment these days? Good grief.
You have no clue what you're talking about, thus you really should keep quiet and educate yourself.

The disease of our culture - the need to write and speak something/anything far outweighs the value of the content.

The internet is chock full of worthless blabbering. The post above is a perfect example.

Hint: Instead of guessing, why not do some actual research and post FACTS? Ah, so much easier to just lazily speculate. It fits your viewpoint. You have a bias - and your post is a self-reinforcement of that bias. BTW - you might very well turn out to be correct. Guesses are sometimes correct.

"more bad policies than ever".

Prove it. Otherwise you have no reason to believe such a thing.

In fact, underwriting guidelines have become much tougher. Also, real estate prices having dropped x% so far are de facto better bets than previous vintages.

The laughable part is that taken as a whole these new mortgages are the least risky of the past 4 years (or more) - and yet the lenders are more afraid than ever. Human behavior - project the past into the future. And that is what YOU are doing as well.

"If the monolines collapse, the mortgage insurers could be next."

Wow - what a heroic statement. Nobody has thought of that one happening. Really? MI's are in trouble? Who knew?

Must write. Must write. Must write. Fill that space!

[Straightlyput]

I know very little of MI. When I bought my house, my reaction to MI and Title insurance was: What a rip off.

From the other end: What a sure in business!

Then there is all the reports on the trouble of the monolines. Even now, after a lot of searching and reading, I still do not understand why the MIs are better off than the Monolines.

The borrower (B) borrowed 135K on a 150K house after 10% down. The lender (L) makes him to pay for MI for a 25% coverage (33750). The lender (or Underwriter?) takes the mortgage (packaged it into CBO) and sells it to the Investor (Ir) for whatever price. Ir does not feel comfortable with the mortgage, so it goes to the Monolines and purchased insurance on its investment.

B cannot pay. So the house is foreclosed and eventually sold for 100K. Assuming B did not pay down his mortgage at all, and then the total loss is 50K. B obviously losses his 15K down pay. The MI is on the hook for the 33750. Then the monolines is on for only 1250 and the investor is made whole again: 13500 = 100000 + 33750 + 1250.

What I don't understand are these:

1. MI has to take the hit BEFORE the monolines: only after the MI has paid its full coverage will the investors' monoline policies even affected. Then how can MI be standing if the monolines are falling?

2. The lenders made the borrowers pay MI. If the MI is a good deal, why the lender not just keeps the premium? If the MI is a bad deal, then the MI companies are not safe, then what is there to make the lender fell safer?

3. I know this will sound stupid, but truly I want to know. When B cannot pay his mortgage, obviously he is not paying his MI premium either. Does that mean the MI is therefore canceled? If I don't pay the premium of my life, auto, house, medical insurance, that is what will happen.

4. In the fourth quarter alone its claims reached $1.3 billion. How much did it pay out?

5. When does MTG has to pay? When B did not pay for 90 days? Or when the house is foreclosed?

Thanks a lot if any of you knowledge people would care to provide some answers.