Fitch downgrades 3 mortgage insurers, cites outlook

NEW YORK, Oct 17 (Reuters) - Fitch Ratings on Friday downgraded ratings on three mortgage insurers, citing the continued weakness in the industry stemming from exposure to mortgages sold in 2006 and 2007.

The agency said it does not expect the mortgage insurance industry to return to profitability until 2010 at the earliest.

Fitch cut the insurer financial strength (IFS) rating of Genworth Mortgage Insurance (GNW.N) by two notches to "A-plus,", or fifth-highest investment grade. It cut the IFS rating of Mortgage Guaranty Insurance Corp by two notches to "A-minus," or seventh-highest investment grade and lowered its IFS rating on PMI Mortgage Insurance Co by three notches to "BBB-plus," or three notches above speculative grade.

Fitch said it is reviewing the "AA-minus" ratings of United Guaranty Residential Insurance Company and expects to issue a note within a week.

It is also reviewing the "AA-minus" rating of United Guaranty Residential Insurance Company as part of a review of its parent, American International Group.

"Looser underwriting, increased incidence of fraud and sharp home price depreciation have resulted in high levels of early term delinquencies which, in turn, have caused the MI industry to post significant loss reserves," Fitch said in a statement.

The agency is expecting delinquencies and losses for the sector, and is estimating on average a 30 percent peak-to-trough decline in home prices nationally.

Fitch said changes in underwriting practices that have been implemented as a result of the current market turmoil will likely result in an improved credit profile. Mortgage insurers have also raised prices by an average of 20 percent.

However, "while the prospects for future business are positive, these are overshadowed by the near-term challenges of the legacy insured portfolios," said the statement.

If the economic downturn persists, mortgage insurers will likely be hit with rising losses. They will also be limited in how much they can write under new underwriting guidelines because companies will need to conserve capital in the near term.

(Reporting by Ciara Linnane; Editing by Chizu Nomiyama)