Mortgage Insurer Downgrades – This One Could Sting…Badly

Posted on August 27th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Ratings agency news flow has been heavy over the past month. This is just the latest and what I feel to be extremely significant.  Despite the stock prices of the mortgage insurers being near zero, they still play an important function on many levels.

Kind of like the Bond insureres (Ambac and MBIA) near failure reeking havoc in the structured finance world, the mortgage insurer’s failure could hit everything else. Without mortgage insurance the individual mortgage units do not have the supposed credit support that the owners or the ratings agency thought, setting them up for significant losses.

I can’t count how many times I have heard a CEO over the past year and a half say ‘oh, but that pool of loans all have mortgage insurance’.  But now that the defaults are soaring and classes of loans that never were viewed as ‘high-risk’ such as Jumbo Prime are being downgraded by the ratings agencies, are the mortgage insurers safe?  Were the premiums high enough on Jumbo Prime for example to cover losses never expected to be so large?  How can either be.

Also, if the mortgage insurers are somehow taken out of the picture it would significantly impact mortgage lending going forward because you would be unable to get a loan over 80% loan-to-value.  Either that, or the banks would have to sharply raise mortgage rates in order to compensate for the risk.

Always be conscious of the nasty feedback loop in which we find ourselves…higher rates equal lower home prices. Lower home prices equal increased pressure on home owners and more loan defaults and foreclosures. More foreclosures equal more supply and lower home prices. And on and on and on.

*URGENT – On a last note, if I am not mistaken Radian is now the last insurer going over 90% loan-to-value in ‘declining market’ regions, which happens to be just about every populated area in the nation. I wrote about it on August 4th (click here for story). If Radian experiences further trouble they may scale back to 90% as well on new business.  This means that even if Fannie, Freddie or other lenders go to to 95%, lenders won’t do the loan over 90% because they can’t obtain insurance.

As a result of this post, a long-time friend just sent me a note saying he talked to a Radian rep and they will be falling in line with the other mortgage insurers, cutting LTV’s to 90%, by October at the latest. This means rates go up for the borrower so banks can self-insure or Fannie Mae and Freddie Mac will only be doing 90% LTV loans in the majority of the heaviest real estate markets in the nation.

I believe the mortgage insurers represent significant financial sector and housing market risk that the market has not factored as of yet. -Best, Mr Mortgage

Wall Street Journal: S&P Downgrades Units of Three Mortgage Insurers

Standard & Poor’s Ratings Services downgraded its credit ratings on the units of three mortgage insurers, reflecting its expectations for increased claims and concerns about the profitability of insured mortgages originated this year.

The ratings firm, a unit of McGraw-Hill Cos., added that its projected claims for mortgages originated in 2006 and 2007 indicate that the volatility of mortgage insurers’ operating results is significantly greater than S&P assumed before the deterioration in the mortgage and housing markets.

S&P expects the 2008 vintage will generate a moderate underwriting profit for most mortgage insurers, but the significant uncertainty in the mortgage and housing markets suggests an underwriting loss is possible.

The ratings firm lowered its grades on units of Old Republic International Corp., PMI Group Inc. and Radian Group Inc., also pointing to unfavorable comparisons of the companies’ results for the first half of the year with S&P’s forecasts.

The units of PMI and Radian saw their ratings cut by two notches, to A- and BBB+, respectively, while Old Republic’s ratings got a one-notch downgrade to A+. Radian’s new rating reflects below-average credit quality. The ratings of the parent companies were also downgraded. PMI’sratings are subject to additional downgrade, withS&P noting it would likely lower its ratings another notch or affirm them with a negative outlook within 30 days. Continued.

Write to Lauren Pollock at lauren.pollock@dowjones.com

11 Responses to “Mortgage Insurer Downgrades – This One Could Sting…Badly”

  1. Also, if the mortgage insurers are somehow taken out of the picture it would significantly impact mortgage lending going forward because you would be unable to get a loan over 80% loan-to-value.

    Some states are already there. No PMI on condos in Florida. 90% PMI on most conforming. FHA is all there is and they are about to get real expensive.

  2. pardon my ignorance, but I’m sure there are other people with the same need for clarification:
    Radian is now the last insurer going over 90% loan-to-value in ‘declining market’ regions,

    Does this mean people can still get loans with <10% down? Aside from FHA’s 3% down stuff. I was under the impression that unless you did FHA, you had to have 20% down now. Am I wrong?

  3. dafox,
    yes, you are. fannie and freddie conventional loans can go up to 95% (5% down) as long as you are not deemed to be in a declining market.

  4. Fannie Halts Trading!

    “Fannie Mae has halted trading of their preferred stock in after hours. Executives resign, new CFO appointed. Fannie looking to “…preserve equity…””

  5. All of the mortgage insurers are “DEAD MEN WALKING” (except maybe Genworth) it’s been just a matter of time. To tell you the truth, I still have them, MBIA and Ambac all scheduled to fail by Sepember 30, 2008.

    The next 33 days will be quite a show. House of Cards or Dominos call it what you may, but the speed of the collapse is about to accelerate out of anybody’s control.

    It’s been moving in slow motion this past year, thanks to the Ben and Henry show, but THE FNMA & FHLMC RESCUE will trigger THE STRAW THAT BREAKS THE CAMEL’S BACK.

    Call me Doom Sayer, call me Grim Reaper, I’ve been called them all this past year, but everything I’ve said would happen, has happened and has just paved the road to where we are today. (ON THE BRINK)

    I’m not the only one who has seen this coming (Google: September 2008) I GOOGLED IT out of frustration thinking “Am I the only one that sees this?” I just wanted to see what came up and to my surprise. I’m not the only one calling the EXACT SAME TIME LINE.

    I’m not telling you this to scare you, I just want you to be aware so you are not caught off guard and surprised by what’s about to unfold.

    I’m sorry to say, I don’t know what happens beyond the financial collapse. I suspect a very different reality World Wide and very tough times for all.

    Take Care!

  6. Moody’s Reviewing 2006 2007 Jumbo/HELOCS!!. . .link:

    http://www.bloomberg.com/apps/news?pid=20601087&sid=a2c71Nq2xb.w&refer=home

    Just like Mr. Mortgage said – “movin on up”. . .hmmmm wasn’t that the song from the old Jefferson’s Show?

  7. Jim T, there is a definitive reason for the September date. Starting September 2’nd and moving on throughout the remainder of the year there are 100’s of Billions of dollars of debt that must be rolled over by many of the the financial firms. They are A) Not ready for this. B) Do not have the capital to handle this. C) Cannot raise the additional capital needed to handle this. D) Are looking to be “Bailed Out” but unfortunately for them, they are NOT to big to fail. E) Realize the jig is up.

    Other than that things are going pretty well out there…

  8. US GDP Growth revised upwards to 3.3% , according to the http://bigpicture.typepad.com/comments/2008/08/gdp-33.html

    “The overwhelming story is that the export numbers have offset this domestic weakness in consumer spending and business investment. We have a domestic recession.”

    These numbers seem to be coming from fantasia. Where the tooth fairy who fudged enron’s accounts seems to be working for the Department of Total Disconnect from reality!

  9. The comments lose all credability when the gov’t numbers are suggested to be “fudged”. Do you even realize the number of individuals that would have to be involved in such a conspiracy. It kind of reminds me of people that say “911 was an inside job”.

  10. The govt has an implicit benefit to “fudging” the numbers. Have a look at http://www.shadowstats.com and for calculating REAL GDP the Govt uses a GDP deflator of 1.2% whereas they say inflation in the economy according to the CPI is 5.6%. There are very real discrepancies in the measure of govt statistics.

    If we were to measure Inflation & Unemployment the way we did in the 1970s, we would see unemployment much closer to U6 Unemployment levels of 9.7% (versus the popularized headline inflation level, U3 now at 5.5%); the inflation measures would see an greater differential, CPI might be closer to 10+.

    That would put the Misery Index somewhere between 17 and 21,pretty close to the 1970s highs.

    Every successive administration has sought to change the way measurements occur right from the 60’s. Makes them more electable (or so they think).

    Hedonic substitution and geometric vs. arithmetic weighting now severely understate the actual cost of living increases.

  11. For anyone to suggest that the GOVERNMENT “would not” fudge the numbers (GDP, Unemployment, inflation, etc…)is either a Forest Gump or a government employee. (Sorry Forest)

    This government has gone far beyond fudging numbers to keep HousingRealist as ignorant as he or she is and anyone else that would use “911” as an example. But as horrible and unthinkable as that example may be, lets use it to compare how far our government has gone in the past.

    “Weapons of Mass Destruction” lie has killed far more people than 911 and the number is still mounting.

    “The killing of John Kennedy, Bobby Kennedy and Martin Luther King” Who really killed them?

    The “GOVERNMENT” won’t tell you the truth! Why? (BECAUSE YOU CAN’T HANDLE THE TRUTH)is their excuse, but the real reason is because “WE THE PEOPLE” would have to root out the REAL POWER BROKERS running this country and have to kill them to free ourselves of their influence.

    Re-reading this RANT you would think I was a Bleeding Heart, Left Wing Democrat and nothing could be further from the truth. I’m a Vetran and Registered Republican of 25 years.

    I’m sorry, the use of the 911 thing just upset me.

    Cheers!

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