Private mortgage insurers provide an alternative market for federal government insurance programs by covering for losses stemming from homeowner defaults. With the 30-year mortgage rate of 3.39% at its lowest since the past 10 years, homeowners have an excellent opportunity to take advantage by refinancing their home loans to not default. Homeowners who wish to put a down payment of less than 20% of the sale price of the house are required by regulatory authorities to insure their mortgage. Where the two mortgage insurers, MGIC Investment (MTG) and Radian Group (RDN), have attractive valuations, MTG has failed to meet the minimum capital regulatory requirement, and Radian has not been able to post impressive operating statistics. Therefore, we recommend investors to hold the stocks.
MGIC Investment Corp.
MGIC Investment stands to be the largest mortgage insurer with $166.7 billion direct primary insurance in force at the end of the second quarter of the current year. The company has operations across all the states of the U.S. The company has remained in losses since the past eight quarters, and at the end of the second quarter, it breached the regulatory requirement of the risk-to-capital ratio. The regulators require a private mortgage insurer to keep a risk-to-capital ratio of 25 times, and the company had a risk-to-capital ratio of 30 times at the end of the most recent quarter. It also failed to keep the minimum policyholder position (MPP), as the company was required to keep a MPP of $1.3 billion. MITG fell short by $211 million.
The company reported its latest operating statistics on October 8, 2012. As far as delinquencies are concerned, the figures were bullish when compared with the previous month of the same year. Ending primary delinquent inventory remained at 148,885, 1% below the figure of September 2012. The company was able to write $2.2 billion worth of primary new insurances, which was 12% below the new insurances written by the company in the month of September 2012. This meant that the company could not sell new policies until it met the regulatory requirement. In early October, the amount of capital MTG required was cut by half, which meant that the company now had to contribute only $100 million.
Moody's, the premier U.S. credit rating agency, also downgraded the company from B1 to B2 due to the continuous depletion of the company's regulatory capital
Analysts have a consensus mean price target of $1.33 and a high price target of $2.5 per share for a stock that is currently trading at $1.66 . Analysts expect a $0.6 loss per share for the third quarter of the current year.
Radian Group Inc.
Another major player in the U.S. mortgage insurance sector, Radian Group is all set to offer a new unique program to homeowners with the name of Responsible Homeowner Reward, where those borrowers who have modified their home loans through the government-sponsored Home Affordable Modification Program (HARP) would be encouraged to make timely monthly mortgage payments. The program is aimed at reducing delinquent loans. Unlike MTG, Radian is reported to meet the regulatory capital requirements of a risk-to-reward ratio of 25 times for the rest of the year.
According to the September 2012 operating statistics, the company was able to write $3.5 billion of new mortgage insurances, against $3.75 billion written in the month of August of the current year. Ending inventory of delinquent loans remained largely flat at 94,831 for the month of September when compared with the previous month.
Analysts have a consensus mean price target of $3.4 per share with a high target of $4 per share for the stock, which is currently trading at $4.37 per share. Analysts expect $0.52 loss per share when the company reports its performance for the third quarter of the current year.
Both stocks trade at significant discounts to their book values. The stock of MTG, which has seen around 55% price depreciation since the beginning of the year, trades at a discount of 61% to its book value, whereas the stock of Radian, which has seen around 87% price appreciation since the beginning of the year, is currently trading at a 35% discount to its book value.