Mortgage insurer MGIC Investment Corp. today reported a $372.5 million third-quarter loss, and said it does not expect to make a profit next year as it pays out up to $1.5 billion in claims.
MGIC said losses for the quarter were driven in part by one-time charges, including a $303 million after-tax write-down of the value of the company’s investment in a subsidiary, C-BASS, that invested in subprime mortgages.
But the company also saw paid losses on the loans it insures climb to $602 million, compared with $165 million in the same quarter a year ago, as the number and size of delinquent loans grew. MGIC said fourth-quarter paid losses are expected to total $270 million to $290 million, and that paid losses will total $1.2 billion to $1.5 billion next year.
The company said the rising popularity of mortgage insurance and improved credit standards should benefit in the long run, and that the company is “well positioned” from a capital perspective.
MGIC has been writing more insurance policies during the housing downturn, with new insurance written during the third quarter totaling $21.1 billion, compared with $16.6 billion in the same quarter a year ago.
At $196.6 billion, primary insurance in force on 1.37 million mortgages at the end of September was up 11.4 percent from nine months ago.
But in recent years, a growing proportion of mortgages MGIC insures have had higher risk factors, including loan-to-value ratios above 95 percent, FICO scores below 620, limited documentation, or debt-to-income ratios of 38 percent or higher.
MGIC has recently been cutting back on such loans. But as of Sept. 30, about 87.5 percent of MGIC’s “risk in force” was connected to loans to prime borrowers with FICO scores above 620, 9.3 percent on alt-A loans with FICO scores of 575 to 619, and 3.2 percent on subprime loans with FICO scores below 575.
MGIC reported that delinquency rates on subprime loans hit 30.65 percent during the third quarter, compared with 26.17 percent a year ago. Delinquencies on alt-A loans climbed to 17.35 percent in the third quarter, compared with 16.92 percent a year ago.
The most abrupt rise in delinquency rates was on reduced-documentation loans of all FICO scores, which jumped from 7.38 percent a year ago to 12.14 percent at the end of September.
But delinquencies on prime loans, which had been tracking at around 3.6 percent during 2006 and the first half of 2007, also jumped 28 basis points from the previous quarter to 3.86 percent.
C-BASS losses
Losses at MGIC subsidiary Credit-Based Asset Servicing and Securitization LLC, or C-BASS, scuttled a planned merger with Radian Group Inc., a credit risk management firm that’s also invested in C-BASS.
The merger of MGIC and Radian was called off in September, after the companies said they stood to lose their entire $1 billion investment in C-BASS, which owns risky mortgage-backed securities. MGIC confirmed today that it will take a $466 million charge on its C-BASS losses — an amount equal to the previously estimated value of its entire investment in the company as of June 30.
MGIC reported $11.3 million in pre-tax expenses related to calling off the merger. The one-time expenses associated with the C-BASS losses and the scuttled merger were partially offset by selling off a portion of the company’s stake in a debt collection firm, Sherman Financial Group, for an after-tax gain of $105.9 million.
MGIC said it’s also in a dispute with the IRS, which claims the company owes $189.5 million in back taxes and penalties on its tax returns from 2000 to 2004. MGIC said it has paid the IRS $10.5 million to settle some issues, and is appealing an IRS determination that it should not have deducted from taxable income losses from the company’s investments in Real Estate Mortgage Investment Conduits (REMICs).
Scrutiny by rating agencies
MGIC said its risk-to-capital ratio had climbed to 7.9 by the end of the quarter, compared with 6.4 a year ago.
So far, the financial strength ratings of MGIC’s subsidiary, Mortgage Guaranty Insurance Corp., remain unchanged at AA (Standard & Poor’s Rating Services), Aa2 (Moody’s Investors Service) and AA (Fitch Ratings).
But MGIC said one rating agency is considering downgrading MGIC’s financial strength rating, and others may take similar steps.
In addition to assessing whether an insurer has enough capital to withstand extreme loss ratios, rating agencies consider a company’s historical and projected performance, competitive position, management and corporate strategy.
“We believe a financial strength rating of at least Aa3/AA- is critical to a mortgage insurer’s ability to continue to write new business,” MGIC warned investors. “Any downgrade below such level could have a material adverse (effect) on us.”
