The mortgage insurance companies that insured Equity Programs Investment Corp. (EPIC) are trying to work out a plan to prevent the troubled real estate syndication company from defaulting on as much as $1.3 billion in mortgages and mortgage-backed securities.
The insurance companies face losses totaling $400 million if EPIC collapses, and some of them could be wiped out by the failure of EPIC, warned executives of Standard & Poor's Corp., the credit-rating service.
The insurance companies are "still kicking around and coming up with ideas for someone to step in to restructure EPIC," said William Stover, chairman of Old Republic International Corp., the parent of one of the insurers.
Stover said the companies have not worked out a plan, but the two possibilities under consideration are finding some firm to take over EPIC or having the insurance companies themselves take over.
"How the [insurance companies] could take over EPIC, I'm not sure," said William Fitzpatrick, general counsel for Ticor Mortgage Insurance Co. But he confirmed that Ticor was working with other insurers "and other parties" to head off massive claims that would occur if EPIC defaults.
The New York investment banking firm of Salomon Brothers Inc. said that it has been called in -- though it would not say by whom -- to help rescue EPIC, which disclosed last Friday that it is behind on monthly interest payments on more than $1 billion worth of home loans.
EPIC is a $1.5 billion Falls Church real estate investment company whose owners also control Community Savings & Loan of Bethesda. When reports of EPIC's problems started a run by Community depositors last weekend, Maryland Gov. Harry Hughes issued an emergency order halting all withdrawals for 20 days.
Community is one of the largest Maryland savings and loans that has not yet qualified for federal deposit insurance. Community has been told it will not qualify for federal deposit insurance until it severs its ties with EPIC.
Pressure on the insurance companies to bail out EPIC quickly increased yesterday when Standard & Poor's put Ticor Mortgage Insurance Co. on a "watch list" because of "its exposure of more than $100 million" to EPIC. S&P, the chief credit rating service for business, also said that until the EPIC situation is resolved, it will not give ratings on any mortgage-backed securities where Ticor is the insurer.
S&P's refusal to issue a rating on mortgage investments backed by Ticor is expected to dry up much of Ticor's business, because credit ratings are demanded by investors.
The S&P action followed by a day an announcement from Moody's Investors Service that it is considering downgrading its rating of Ticor's ability to pay claims -- another crucial factor for investors.
In addition to Ticor, the principal EPIC insurers are Mortgage Guaranty Insurance Corp. and Republic Mortgage Insurance Co., the Old Republic subsidiary.
EPIC officials did not return reporters' telephone calls yesterday.
After Hughes imposed his freeze on withdrawals on Monday, Community announced that it was closing its offices entirely for two days, but last night it said it would not reopen today. A spokesman said that "all business that would have been transacted at the branches can be transacted by phone." He said customers may call 301-493-6555. The spokesman said he had not been told when the institution would reopen.
The Federal Home Loan Bank Board, which supervises federal savings and loans, ordered Community to sever its connection with EPIC only two days before EPIC announced it could not pay some of its bills.
Bank board officials yesterday refused to say if they had had any information about the impending problem. They said only that Community's application for insurance was under consideration.
EPIC, which has been in business for about a decade, sets up investor partnerships to buy model homes or newly built homes from builders. The partnerships operated these as rental properties, deriving tax benefits and hoping to profit from the eventual sale of the houses.
The sales to the partnerships were financed by mortgages placed by EPIC Mortgage Inc., a subsidiary of EPIC and another sister company of Community. EPIC Mortgage then sold the loans or placed them in pools and issued securities based on the pools, thus recovering its funds to enable it to make new loans.
Industry sources and current and former EPIC employes have said, however, that the rents on the houses were not adequate to cover mortgage payments and other costs. At the same time, house prices did not appreciate fast enough to allow profitable sales.
The National Association of Securities Dealers said it is looking into the sale of EPIC partnerships by ESI Securities, another EPIC subsidiary.
Because ESI is a registered investment broker, NASD has authority to investigate its sales practices and financial procedures as well as allegations of fraud, a spokesman for the self-regulatory agency said.
Several investors who have bought into EPIC partnerships said they fear they will lose their capital. Industry observers said, however, that the biggest potential losers remain the mortgage insurance companies.
These companies provided insurance on mortgages on some 20,000 single-family homes owned by investor partnerships set up by EPIC. Typically, these policies covered 20 to 25 percent of the loan amount; the sale of the property following foreclosure is supposed to allow the mortgage holder to recover the remainder of the money loaned.
In some cases the insurance companies also wrote coverage on pools of mortgages upon which mortgage-backed securities were issued.
Of the three companies most involved, Ticor's "exposure to the problem relative to its capital base is much greater than the other companies'," said Lawrence Hayes, vice president of Standard & Poor's.
Ticor said yesterday its total exposure was about $160 million, although it stressed it could not determine what its actual liability will turn out to be. Republic has put its total exposure at $100 million and MGIC at $60 million to $70 million; those two companies reinsured much of the EPIC business with other companies, reducing their risk.
Michael Molesky, a senior analyst at Moody's, predicted that the mortgage insurers would quickly become involved in a restructuring of EPIC in order to protect themselves. "By getting in there earlier, by managing the property and selling it sooner, they are in better shape," he said. "There's a lot that they are going to do to shorten some of those losses."
He said he believes the insurers will have to sell the properties to halt cash outflows from EPIC. "Any interim solution is only going to forestall the problem," he said.
Molesky said that much of the reinsurance is with foreign companies, and if enormous claims occur, it could frighten the foreign companies away from future deals.
One person familiar with mortgage-backed securities -- which entitle their owners to share in the payments by borrowers into a pool of mortgages -- said that the mortgage insurers got into trouble over EPIC because they failed to realize how concentrated their risk was.
Usually mortgage insurers seek to diversify their risks, geographically and in other ways. But with EPIC, "they missed a subtle point." Although "the portfolio [of houses] was diversified, the risk was not . . . . It was all one guy," EPIC, this expert said.