UPDATE 3-MGIC soars as investors cheer regulatory capital waiver

* MGIC main unit gets minimum capital requirement waiver

* Says waiver till Dec 31, 2011

* Says still working on Freddie Mac approval for MIC

* Stock gains as much as 20 pct

* News lifts other mortgage insurer stocks (Adds analyst, S&P comments, details; updates stock activity)

By Anurag Kotoky

BANGALORE, Dec 3 (Reuters) - MGIC Investment Corp (MTG.N), the largest U.S. mortgage insurer, said it received a waiver till 2011 from Wisconsin regulators for its principal unit to maintain a minimum level of regulatory capital to write new mortgage guaranty policies.

MGIC shares rose as much as 20 percent to $5.11 in morning trade and were the biggest percentage gainer on the New York Stock Exchange.

The waiver eases concerns about the company's ability to tap new business in an improving housing market with a fresh subsidiary, which still is in the process of getting sufficiently capitalized.

The positive news at MGIC drove shares of its smaller peers higher. Radian Group (RDN.N) was up 12 percent, while PMI Group PMI.N gained more than 7 percent.

"Its been out there on the table for sometime ... I think its definitely a hurdle that the company has now overcome," Piper Jaffray analyst Michael Grasher said by phone. S&P Equity Research upgraded MGIC to "hold" from "sell" in light of the news and raised its price target by $2 to $6.

The Office of the Commissioner of Insurance for the State of Wisconsin (OCI) approved a change in its subsidiary MGIC Indemnity Corp's business plan, MGIC said in a regulatory filing.

In July, MGIC Investment said it plans to wind down its existing operations and capitalize a unit at the beginning of next year in a move that could help the company build fresh investments as the housing market stabilizes.

Under the new plan, MIC will write new business only where MGIC does not meet minimum capital requirements similar to those waived by the OCI and does not obtain a waiver from that jurisdiction's regulator.

WAITING GAME WITH FREDDIE

Milwaukee-based MGIC said it is still working with Freddie Mac FRE.N to obtain approval of MIC as an eligible insurer, and Freddie has "indicated that it needs additional analysis before it makes a decision regarding MIC."

"It (the waiver) certainly does not hurt, but Freddie Mac needs to remain independent in making their own decision about this," analyst Grasher said.

Grasher expects MIC to get approvals from all quarters to write business by mid-2010.

Government controlled mortgage finance firm Fannie Mae FNM.N approved MGIC's insurance unit MIC as an eligible mortgage insurer thro4ugh the end of 2011.

However, Fannie Mae's approval was subject to certain conditions, including the OCI waiving the minimum regulatory capital requirement for MGIC to continue to write new business.

MGIC recently capitalized MIC by $200 million, it said in the filing.

Mortgage finance companies Fannie Mae and Freddie Mac partner with insurers like MGIC to help shield them from losses.

A home buyer who cannot offer a 20 percent down payment, for instance, will often turn to mortgage insurers. These insurers are expected to benefit from the U.S. government's push to reduce defaults and let homeowners keep their homes.

WOES NOT OVER YET

Despite the waiver, MGIC's problems may not be over yet, analyst Grasher said.

"They have still got those delinquencies which are very high ... It remains to be seen how much of impact loan modifications will have going forward," he said.

S&P also warned that MGIC may lose market share to firms with cleaner balance sheets.

Mortgage insurers like MGIC, Radian and PMI have suffered huge losses from backing subprime bonds and mortgages that saw a surge in defaults as U.S. credit and housing markets worsened.

Although the waiver comes as a positive for the industry in general, MGIC's peers have different business models and risk exposures, which need to be addressed differently, Grasher said.

MGIC shares, which have gained more than six-fold since hitting a low of 70 cents in March, were up 18 percent at $5.02 in midday trade. More than 1.56 million shares changed hands by 1825 GMT, compared with a 10-day moving average volume of less than a million. (Reporting by Anurag Kotoky in Bangalore; Editing by Deepak Kannan, Ratul Ray Chaudhuri) ((anurag.kotoky@thomsonreuters.com; within U.S. +1 646 223 8780; outside U.S. +91 80 4135 5800; Reuters Messaging: anurag.kotoky.thomsonreuters.com@reuters.net))