The Week Ahead For Mortgage Insurers

Includes: GNW, MTG, RDN
by: David Sims

Several mortgage insurers will report earnings this week. Additionally a key housing index will be released on Tuesday. The mortgage insurance industry has been heavily depressed since 2008, but there are signs of a turnaround in housing, which would have a huge effect on loss reserves for this sector.

Last November, PMI Group Inc. (PPMIQ) declared bankruptcy and shares collapsed, sending the mortgage insurer to the penny stock levels. The demise of PMI has left three major players in the mortgage insurance sector. Radian Group Inc. (RDN), MGIC Investment Corp. (MTG), and Genworth Financial Inc. (GNW) could each be labeled as an ultra-contrarian investment. Since the financial crisis, each company's stock shares have found difficulty rising off of base levels.

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Genworth Financial Inc. will announce earnings on July 31st. The company is expected to earn $0.18 cents per share on revenue of $2.5 billion. Outside of mortgage insurance Genworth also has a large presence in other financial services and products. The current price to book ratio of 0.16 reflects investor distrust of management and general discontent. In May, the CEO resigned after botching an IPO of an Australian mortgage insurance unit, which was expected to provide cash to buy back company shares.

Also, on July 31st, the Case-Shiller 20-city Index will be released at 9:00 am. Analysts expect the index will show a month-over-month decline in home values of -1.8% for May 2012. For the same period, the Federal Housing Finance Administration (FHFA) reported that prices rose 0.8% and Zillow reported that prices rose between the 1st and 2nd Quarters.

Radian Group Inc. is set to announce earnings on August 1st. Radian is expected to lose -$0.55 cents per share on revenue of $178 million. The current price to book ratio of 0.36 reflects investor fear of continued losses from delinquent mortgages.

MGIC Investment Corp. is set to announce earnings on August 2nd. MGIC is expected to lose -$0.53 per share on revenue of $298 million. Similar to both Genworth and Radian, the price to book value of this stock is significantly depressed at 0.39.

If decent results are reported for the quarter, corresponding to improved trends in housing, then these stocks may have found a bottom, along with housing in general. Kyle Bass of Hayman Capital felt strongly enough about the future of MGIC in November of 2011, that he purchased over 10 million shares.

The housing recovery appears to be making a tepid comeback in some areas, while in others a very strong rebound. For instance, in terms of pricing, homes have finally registered a year-over-year improvement, according to Zillow.

Additionally, buried in last week's GDP report, it appears that we now have five consecutive quarters of growth in residential investment. This followed a long period of declines in seven out of the prior ten quarters.

Last week, the National Association of Realtors and the Census Bureau reported poor pending home sales and new homes sales, falling below forecasts. However, from some points of view, the poor performance in sales volume is due to a lack of available inventory. Homeowners, banks, and builders are unwilling to sell at reduced prices. Some of the bank-owned REO inventory is also moving into the hands of institutional investors. At the beginning of July, the Federal Housing Finance Administration (FHFA) announced the successful completion of a bulk sales auction of nearly 2,500 properties.

From a demand side, record low interest rates are being pushed by the Federal Reserve policies of quantitative easing and twisting the yield curve. Last week, 30-year fixed mortgage rates dropped below 3.5%. According to, the cost of renting has outpaced the cost of buying in nearly all major metro areas of the United States.

Whether you believe the trends have significantly improved, or are just beginning to take shape, there is a possibility to profit from improvement in housing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.