Are MGIC’s days to default numbered?

Reporting its sixth straight loss, the private mortgage insurer MGIC Investment Corp. (MGIC) announced it has gotten waivers from Fannie Mae to continue writing mortgage insurance policies.

MGIC has suffered repeated losses covering mortgage lender risks of loss on foreclosure, inching closer to joining the ill-fated group of other beleaguered private mortgage insurers, including Radian Group Inc. (RGI), PMI Group Inc. and Triad Guaranty Inc.  PMI and Triad Guaranty Inc. have been ordered to stop writing policies, but MGIC plans to continue business.  MGIC’s losses will soon place its risk-to-capital ratio beyond the 25-to-1 ratio allowed by state regulators in Wisconsin, where the insurer is headquartered.

The ratio of borrowers reinstating loan payments to those remaining in default has grown more disparate, from a 95-to-100 ratio in 2010, to an 87-to-100 ratio as of November 2011. While MGIC reported a fourth quarter net loss of $135.3 million compared to last year’s $186.7 million loss, policy sales have also decreased 2.8 percent and the rate of borrower default continues to drain the company’s resources.

first tuesday take: Think privatization, or just supporting private enterprise over government enterprise — in this case MGIC versus government-sponsored enterprises (GSEs) and the Federal Housing Administration (FHA).

For sure, the private mortgage insurance (PMI) industry is the only alternative to the FHA–provided mortgage insurance premium (MIP) for low-down payment sales.  Presently, mortgage lenders operating in California rely on private mortgage insurers to issue coverage since the FHA only covers 40% (a number which is fortunately dropping) of mortgage originations.

In the wake of other major private mortgage insurance providers’ 2011 financial difficulties, MGIC’s reported losses pose difficulties for getting the government out of the mortgage guarantee business, an industry abused for three decades to artificially stimulate the economy via housing. [For more information on the bankruptcy filed by PMI Group, see November 2011 first tuesday article PMI Group seized by AZ Department of Insurance, files for bankruptcy.]

Although low-down payment buyers qualifying for PMI are offered various advantages (such as lower premium rates) over borrowers covered by the FHA’s MIP, nothing creates a more stable real estate market than skin in the game. In the long run, buyers meeting the standard 20% down payment have a higher stake in homeownership. [For more information on skin in the game, see March 2011 first tuesday article Whose skin is in the game?]

These buyers are less likely to default on payments and most likely will stay with homeownership for the remainder of their life. The foreclosure-ownership deficit has turned homeowners into permanent tenants and created a dent in future sales volume that has to somehow be overcome.

More sales volume and fees will be earned in the future with stable 20% down homebuyers today.  But this is a tough sell to large media brokers with large branch office operations that need sales today to survive.

Furthermore, buyers with the ability to make a 20% down payment are not required to have MIP or PMI coverage. In doing so, they save a lot of money by not paying premiums. [For more information on the cost differences between PMI and MIP coverage and 20% downpayment financing, see January 2012 first tuesday article FHA, PMI or neither?]

Still, government has a stake in private insurers staying in the game. For government to get out of the MIP and Frannie guarantee arrangements, as seems to be a mutually held political goal, they must continue to issue waivers to MGIC, despite reported losses. Bail them out if need be, as with GM and Wall Street Banks. Both the government and private insurers are biding time with these waivers, waiting for defaults to stop long enough for the private mortgage insurers to take a financial breath.

The outlook for California is on the rise, with the second three-month drop in notices of default (NODs) recorded to start foreclosure during the fourth quarter of 2011, with sales volume rising over the entire period of time. [For more information on the decline of defaults and foreclosures in California, see January first tuesday article, Defaults and foreclosures drop, for now.]

Re: “MGIC Posts Sixth Straight Loss on Mortgage Insurance Claims” from Bloomberg