Analysts at Fitch Ratings warned today of possible downgrades to the ratings of private mortgage insurers MGIC Investment Corp., PMI Group Inc. and Radian Group Inc., saying the companies may not return to profitability until 2010 and will have to raise additional capital to counter rising losses.
Fitch analysts cited a sharp increase in delinquencies among subprime and reduced-documentation alt-A loans made from 2005 through 2007, saying those loans are more likely to end up in foreclosure than in the past because of reduced options to refinance.
Poor underwriting practices by lenders combined with “continued and accelerating national home-price declines” has made it impossible for many borrowers to sell or refinance a home to avoid foreclosure, analysts said. The phenomenon has “created an incentive to ‘walk away’ from mortgage debt for those borrowers whose current estimated home values are below their current mortgage balances.”
While initially limited to subprime mortgages, “deterioration has begun to spill over to other mortgage asset classes, such as adjustable-rate, negative-amortizing, reduced-documentation (alt-A), and second-lien mortgages,” Fitch said.
While the majority of the U.S. private mortgage insurance industry’s “risk in force” covers mortgages that conform to Fannie Mae and Freddie Mac’s stricter underwriting guidelines, the industry has “material exposure” to nonconforming loans, both in the subprime and alt-A sectors, analysts said — in many cases with the additional risk of “untested” loan products layered on top, such as negative-amortization or interest-only loans.
The extent of the exposure varies by company, but Fitch analysts said all of the mortgage insurers rated by the company have been affected.
MGIC last week reported $1.47 billion in fourth-quarter losses, with claims for the year rising 35 percent to $870 million, while Radian disclosed $618 million in losses for the quarter. PMI Group, which reported an $86.8 million third-quarter loss, is awaiting results from bond insurer FGIC Corp., which it owns a 42 percent stake in, before issuing a fourth-quarter report.
All three companies have raised rates and tightened underwriting standards for their private mortgage insurance policies in recent months.
Fitch took the following actions today:
- Placed on “Rating Watch Negative” the “AA” insurer financial strength ratings of Mortgage Guaranty Insurance Corp. (MGIC) and PMI Mortgage Insurance Co., and the “AA-” insurer financial strength ratings of Radian Guaranty Inc. and its affiliates.
- Changed from “stable” to “negative” the outlook for the “AA” insurer financial strength rating of CMG Mortgage Insurance Co., saying weakness at one of two parent companies, PMI Group Inc., is a “negative drag” on the company.
- Affirmed the “AA” insurer financial strength rating of Genworth Mortgage Insurance Corp. with a stable outlook, saying the company’s conservative underwriting left the company with better risk characteristics than its competitors.
Fitch analysts said PMI and Radian are already short of the capital they need to maintain their current ratings, and that models show MGIC will soon be in the same situation.
Fitch said MGIC’s IFS rating would be downgraded to a notch, to “AA-,” if the company does not raise additional capital.
PMI, which has “large exposure” to alt-A, interest-only and high-loan-to-value loans, faces a downgrade of up to two notches if it cannot raise capital, Fitch analysts said.
Radian, which has exposure to subprime mortgages through its structured mortgage insurance business line, faces a downgrade of one notch if it does not raise additional capital, analysts said.
The insurer financial strength ratings of Republic Mortgage Insurance Co., Triad Guaranty Insurance Co. and Ezer Mortgage Insurance Co. Ltd. remain on Rating Watch Negative for possible downgrade.
Fitch said United Guaranty Residential Insurance Co.’s “AA+” insurer financial strength rating remains stable, thanks in part to “implicit and explicit support from its parent company, American International Group Inc.”
