S&P cuts 3 U.S. mortgage insurers on housing slump
NEW YORK, Aug 26 (Reuters) - Standard & Poor's on Tuesday downgraded three U.S. mortgage insurers, including PMI Group Inc. (PMI.N), citing further deterioration in the housing market and concerns about the profitability of insured mortgages originated this year.
The credit agency said it expects 2008 vintage mortgages to generate modest underwriting profit for most insurers, but warned they still face risks.
"The significant uncertainty in the mortgage and housing markets -- coupled with unfavorable data on early payment defaults -- suggests an underwriting loss is a real possibility," S&P said in a report.
The credit agency said it now expects U.S. home prices to decline 29 percent from the peak in 2006 compared with a 20 percent drop it projected in April. It also sees unemployment rising to above 6.2 percent in 2009 compared to the previous forecast of 5.8 percent.
S&P said higher unemployment may drive significantly greater claims for mortgage insurance.
After reexamining the industry's fundamentals, the agency concluded the sector's credit quality was more consistent with the lower end of "A" category.
"Our more pessimistic assessment of the sector reflects our opinion that U.S. mortgage insurers have limited opportunities for long-term growth and diversification," S&P said.
S&P cut Old Republic International Corp's (ORI.N) counterparty credit rating one notch to "A-minus" and financial strength ratings of its key subsidiaries one notch to "A-plus," the fifth-highest investment grade rating.
It also cut PMI Group Inc's counterparty rating two notches to "BBB-minus," just above the junk level. PMI's mortgage subsidiaries' ratings were cut two notches to "A-minus" and the agency said it may cut them again.
Radian Group's (RDN.N) counterparty credit rating was cut two notches to "BB-plus," the highest junk level, and its insurance arm's ratings were cut two notches to "BBB-plus."
At the same time, S&P affirmed ratings of Genworth Financial Inc (GNW.N) and MGIC Investment Corp (MTG.N).
"All the mortgage insurers we downgraded today have capital adequacy ratios above Standard & Poor's minimum ratio for a "AA" rating. However, we expect the capital adequacy ratios to decline for the next few quarters because of operating losses," it said.
S&P's action could further pressure U.S. mortgage finance companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N), which must reserve for losses for claims the mortgage insurers might fail to pay. (Reporting by Anastasija Johnson; Editing by James Dalgleish)
