S&P on the Mortgage Insurance Industry – Trouble

S&P reported on the Mortgage Insurance Industry ‘MI’ recently. It wasn’t pretty. You have to hand it to S&P on this one. They dealt the industry a blow. At the same time they have forced some critical choices by FHFA Director Lockhart.



There are six principals in the MI business. Here is what S&P had to say about them:

*AIG -United Guaranty Residential Insurance Co to 'BBB+' from 'A-' .
*Radian Guaranty Inc. to 'BB-' from 'BBB+'.
*PMI Mortgage Insurance Co. (PMI) to 'BB-' from 'A-'.
*Genworth Mortgage Insurance Corp. (GMICO) to 'BBB+' from 'A+'.
*Mortgage Guaranty Insurance Corp.'s (MGIC) 'BB" ratings were affirmed.
*Republic Mortgage Insurance Co. to 'A-' from 'A'.

Triad Guaranty a former member of MICA is currently in default.

Fannie Mae commented on the MI ratings dilemma in its 2008 annual report:


FHFA and the Agencies have played fast and loose with their own rules governing activities with the PMI providers. The revised ratings by S&P and other ratings agencies will make it impossible for this to continue. The MI industry has outstanding a total of $460 billion of insurance in force with FNM and FRE. This represents a risk to the Agencies of more than $100 billion.

It would be a mistake for those that have a voice in this matter to stay silent. This story will almost certainly have an unpleasant ending. The following are possible outcomes:

-FHFA, FNM and FRE could bury their heads in the sand and continue to do big business with insurance entities that are rated substantially lower than the guidelines that they have previously set. At some point in the next six months the GSE’s will need more capital. Congress will have to approve at least an additional $200 billion. Having a hand out while at the same time breaking reasonable credit guidelines that result in taxpayer losses and more foreclosures will make the next round of capital for the GSE's a harder sell.

-Mr. Lockhart at FHFA could, “do the right thing” and enforce the existing guidelines. This could trigger a host of problems. If the MI companies are shut out of the income from new business with the Agencies they will have lost a major revenue source. Without that revenue they have limited ability to pay claims. This would result in larger losses for the GSE’s.

More than 20% of the Agencies new mortgage activity in 2008 was enhanced with MI. If this 20% were substantially eliminated the resulting reduction of available mortgage credit could produce another downward leg in the housing crisis. Obviously this runs counter to the Administration’s stated objectives.

Neither of these possible outcomes appear to be attractive. No doubt there are some folks in DC who are trying to come up with Plan B. The usual solution is at hand. Washington will have to TARP the MI companies. Director Lockhart put that thought on the table in a recent letter to the MI industry lobbyist, MICA:


Mr. Lockhart will no doubt continue to stand behind the MI industry. He does not want to lose 20% of his new business activity. On the other hand, Mr. Bernanke and Mr. Geithner will have a difficult time supporting a plan that puts more tax dollars at risk to junk insurers. The optics of the MI story are not good. Bernanke and Geithner risk their credibility if they 'fold' on what looks like an obvious call.

If the discussion on MI is elevated to the White House it is likely that Mr. Summers would see both the pro's and con's and he would lean toward another, "short-term socialization to protect the broader economy" approach. Mr. Volker may have the final voice. As an old Wall Street guy who knows credit my guess is that he will say, "Enough is enough".