Mortgage Insurers' Losses Mount
Problems Feed Fears That Squeeze on Loans Could Worsen

By Renae Merle
Washington Post Staff Writer
Thursday, August 14, 2008

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.

The industry is also tightening its standards to avoid more losses on new loans. In parts of the country hit hard by the housing downturn, that means that a buyer must have a larger down payment, up to 10 percent, as well as a higher credit score. They will also pay higher mortgage premiums.

For a while, it seemed private mortgage insurers could become obsolete. During the housing boom, many borrowers avoided paying for mortgage insurance by taking out two loans, one that covered 80 percent of the purchase price and the second, a "piggyback," to cover the rest. That was considered a cheaper alternative to insurance premiums.

Facing competition, the industry began to provide insurance for subprime loans bundled by lenders and sold to investors, analysts said. The insurers lowered their underwriting standards to compete, they said.

"That to a great extent is where I would say their higher risk exposures came from," said Arlene Isaacs-Lowe, a senior vice president at Moody's Investors Service.

One of the industry's biggest challenges involves its relationship with Fannie Mae and Freddie Mac. The mortgage-finance giants often buy loans with a less than 20 percent down payment and then offset the risk with an insurance policy.

But after being downgraded by credit-rating agencies, several of the insurers fell out of compliance with Freddie and Fannie requirements to do business with them. Both have continued to treat the firms as if they met those standards despite the downgrades but say they are monitoring things closely.

"The current weakened financial condition of many of our mortgage insurance counterparties creates an increased risk that our mortgage insurer counterparties will fail to fulfill their obligations to reimburse us for claims," Fannie Mae said in an Aug. 8 Securities and Exchange Commission filing. During the first six months of this year, Fannie Mae received $830 million from its insurers, up from $547 million during the same period last year.

A strong relationship with Fannie Mae and Freddie Mac is critical to the industry's survival, Cecala said. "All you have to do is say they are no longer eligible to do Fannie, Freddie business and they are out of business," he said of the mortgage insurers' future.