MGIC Investment Corp. (MGIC), the private mortgage insurer (PMI), has reported its seventh-straight quarterly loss. As the California housing market continues to struggle, MGIC’s loss for the first quarter of 2012 totaled nearly $20 million.
MGIC’s losses have started to taper off. The first quarter of 2011 left MGIC with over $33 million in losses, considerably higher than the same period in 2012. Further, the company’s delinquent loan inventory declined from 196,000 in the first quarter of 2011 to 160,000 in the first quarter of 2012. However, while MGIC currently slides under a minimum risk-to-capital ratio of 25, with a ratio of 20.3-to-1, the insurer anticipates exceeding the 25-ratio standard by the second quarter of 2012.
Insurance policy premiums for the company fell 7% between the first quarter of 2011 and the first quarter of 2012. The cost of claims from mortgage defaults rose from $310 million in the first quarter of 2011 to $337 million in the first quarter of 2012.
The ratio of company funds spent on claims to money collected from insurance premiums grew more top-heavy between 2011 and 2012; the ratio was $1.24-to-$1.00 in the first quarter of 2011, and $1.45-to-$1.00 in the first quarter of 2012.
This latest report shows MGIC, which is currently operating on government-issued waivers, was unprofitable for 18 of the last 19 quarters.
first tuesday take:
The tale sounds uncannily familiar… homeowner defaults continue…burden falls on mortgage insurers…insurance company suffers yet another loss — alas for MGIC!
The private mortgage insurer seems fated to follow after Radian Group Inc. (RGI), PMI Group Inc. and Triad Guaranty Inc. as the company continues to sink beneath the incessant barrage of homeowner defaults which have not yet sufficiently abated.
However, MGIC’s balance sheet has a chance to improve, thanks to the Federal Housing Administration (FHA) finally raising their mortgage insurance premium (MIP) rates to nearly double prior rates. Now MGIC can be a competitor and hopefully make money. Already, in California we see a shift, which may be a trend, from FHA-insured loans to PMI of the MGIC type. As the number of PMI loans increases, the premiums for both FHA and MGIC policies are rising. Hopefully the elimination of the FHA’s competitive advantage has not come too late.
Though recent Notice of Default (NOD) rates have decreased, this appears to only be part of the bumpy plateau of California’s housing market. Increases, then decreases, will follow well into 2016, all in a general downward trend but presently at heights 50% to 100% greater than rates at the worst of our past recession recovery in 1996.
NOD rates were at their highest during the first quarter of 2009, with 135,431 NODS recorded, but their subsequent decline has not been a smooth course. NODs in the fourth quarter of 2011 were 61,517, approximately double their rate during the nation’s 2001 recession.
Current NOD rates may be lower than in 2009, but remain high compared to the peaks experienced during the 1996 recovery period. NODs will continue (unfortunately) strong with more to come in the next several years as stagnant prices and the plight of negative equity homeowners persists, motivating — or in some cases forcing — home loan defaults, strategic or otherwise.
The preventative prescription for this kind of blow to MGIC and other mortgage insurers has always been homeowner skin in the game (and being able to charge profitable premiums in competition with FHA also helps). A homeowner will be much less likely to dump onto mortgage insurance companies the sizeable obligation of paying lenders hundreds-of-thousands of dollars if the homeowner has already invested a substantial sum of money in the property by fronting a 20% down payment.
This 20% indicates the homeowner has a real motivation to pay a proper price for a property and then stay with his chosen property and do all he can to maintain possession of it. 20% is a cushion against price drops (though this time around down payments and equities even at 50% did not prevent total destruction of the equity in some instances).
As MGIC is realizing with chagrin, hindsight is 20-20. Let future real estate players take a lesson from the insurance company which will soon be history, unless increased business in the shift away from FHA has a magical effect on MGIC’s balance sheet.
Re: “MGIC Posts $19.6 Million Loss as Borrowers Struggle on Loans” from Bloomberg