Mortgage Insurers' Losses Mount

Problems Feed Fears That Squeeze on Loans Could Worsen

Large mortgage insurers have reported $2.6 billion in losses so far this year, sparking concerns that rising foreclosure rates could force the industry into a money crunch and ultimately make the home-buying process even more difficult.

These insurers make up a critical part of the mortgage industry, taking on the risk when borrowers make small down payments. They are facing record delinquency rates that have sent them scrambling to stem losses and to improve their capital reserves. Those losses have also dinged their relationships with mortgage-financing giants Fannie Mae and Freddie Mac, which the insurers depend on for business.

"What they're battling is a lack of public confidence," said Guy Cecala, publisher of trade journal Inside Mortgage Finance. "They feel like they have enough capital, but nobody really knows."

The mortgage insurance industry is dominated by a half-dozen large firms that insure loans when a buyer makes a down payment of less than 20 percent of a home's purchase price. If the borrower defaults, the insurers pay the lender a portion of the loss. The industry has already paid more than $6 billion to cover claims on foreclosed homes this year, including $3.8 billion during the second quarter, Cecala said. This year's $2.6 billion in losses includes $1.7 billion during the past three months, he said.

If the industry loses its footing, it could transform the way consumers buy homes, either with a return to 20 percent down payments or a shift of even more of the market to the Federal Housing Administration. With FHA mortgages, which require as little as 3 percent down, the government provides the insurance.

Insurers "are a relatively unknown portion of the mortgage market, but could be another wrinkle for mortgage lending," said Steve Stelmach, an industry analyst with Friedman, Billings, Ramsey Group.

Challenges facing the industry are significant. Credit-rating agencies, including Moody's Investors Service, have downgraded some of the largest players. One firm, Triad Guaranty Insurance Corp., is going out of business. Shares of Radian Guaranty, Triad and PMI Mortgage Insurance have lost 90 percent of their value in the past year. For instance, after trading at a 52-week high of $36.25 a share last August, PMI closed yesterday at $2.79.

The industry's future could hinge on whether the economy pushes an unexpected number of homeowners into foreclosure, said Michael F. Grasher, an analyst with Piper Jaffray. The industry currently has enough resources to pay projected claims, he said, "So that's today. What happens a year from now? That is the concern out there, that these companies will face more problems ahead."

The companies say that they are secure despite growing losses. Milwaukee-based Mortgage Guaranty -- the industry's largest player -- lost $97.9 million during the second quarter, but its $4.2 billion in reserves is enough to pay claims and pursue new business, said vice president Mike Zimmerman. The industry has entered a time of uncertainty and much could turn on the rate of delinquencies on loans written in 2007, he said.

Radian expects about 14 percent of the first-lien loans -- which include home mortgages, but not home equity lines -- it currently insures to eventually default. It has set aside $421.8 million to pay out claims this year.

But the Philadelphia firm is working to avoid some claims. Radian will advance lenders up to 15 percent of the value of a potential claim to work out an alternative with the homeowner.

"We have an interest in trying to cure as many of these loans as possible. The more loans that are cured means we'll have to pay fewer claims," said Rick Gillespie, a company spokesman.