Aug 7 MGIC Investment Corp, one of the
largest U.S. mortgage insurers, is caught between a weak housing
market and a very big customer, raising questions about the
future of the money-losing company that writes 20 percent of
private mortgage guarantees.
For four years, MGIC stumbled through the housing crash,
posting a string of losses, breaching capital ratios and being
overtaken in almost every aspect of the business by rival Radian
Now its recovery plan, which involves writing new insurance
through a newly capitalized unit to take advantage of an upturn
in the housing market, is caught up in a $500 million dispute
with Freddie Mac, the government-backed mortgage
financier and a key counterparty on the mortgages MGIC
Freddie Mac says it won't support MGIC's lucrative
operations in seven major U.S. states, including California,
Texas and Florida, until the dispute is settled.
MGIC has won the approval of its primary regulator, the
Office of the Commissioner of Wisconsin (OCI), and the backing
of the other big government-backed mortgage operator, Fannie
But Freddie holds the key and it wants the dispute, over
loss limit policies that it bought from MGIC, settled before
allowing it to write insurance in the seven states.
"If MGIC does not satisfy the requests of Freddie Mac, it
could seriously limit the company's ability to write new
insurance, and if it does settle it could further erode the
capital position," said Barclays analyst Mark DeVries.
MGIC is rapidly losing the confidence of the markets. Its
shares slid to an all-time low of 66 cents on Friday, its bond
ratings have been downgraded, and the cost of insuring its debt
SORTING OUT THE OLD
MGIC said last week that Freddie had demanded that it settle
a lawsuit MGIC had brought against it, add $200 million in new
capital to its main unit, and get the OCI to allow the new
unit's capital to be used to pay off old claims -- all by the
end of the year.
MGIC, which said last week it that needed time to consider
Freddie's demands, declined comment for this article. Freddie
Mac declined comment on specifics of the dispute.
"We will continue to monitor MGIC to see if they meet our
eligibility requirements as an approved mortgage insurer, and if
they are in compliance with our terms and conditions," said Brad
German, a spokesman for Freddie Mac.
MGIC desperately needs to operate its new unit, MGIC
Indemnity Corp (MIC) in the seven states at issue.
They have accounted for 30 percent of its new business this
year and the company fears that major lenders may refuse to do
business with it if it cannot continue to operate nationally.
But if Milwaukee-based MGIC settles on Freddie's terms, its
risk to capital ratio -- already beyond permissible limits at
30-to-1 -- may deteriorate still further, as it has not set
aside a reserve for a possible settlement.
The risk is that MGIC could fall into the same hole as other
mortgage insurers caught by the housing crisis. Old Republic
International Corp and Triad Guaranty Inc have
stopped writing new business and are running off their old
insurance, while PMI Group Inc went bankrupt last
To continue operating, MGIC -- which had $166.7 billion in
private mortgage insurance outstanding at the end of June --
needs not just to end the dispute with Freddie, but do so on
friendly terms to get new business.
"While it is likely that MGIC and Freddie come to an
agreement, it is not a given that these two firms continue a
productive business relationship," said Jason Stewart, and
analyst at brokerage Compass Point Research and Trading LLC.
MGIC needs Freddie Mac to sign off on the new unit.
If even one of the two big government-backed entities does
not approve MIC, lenders will not know which of them will buy
the mortgages until they have been issued and have mortgage
insurance. The uncertainty may lead them to refuse to do
business with MIC.
Should MGIC yield and agree to Freddie's terms, this will
add to pressure on its bond ratings and risk profile.
Debt rating agency Standard and Poor's last week cut its
rating on MGIC's two operating units by one notch to B-minus and
said the outlook for the company was negative.
Liquidity concerns drove the cost of insuring MGIC's debt
sky-high last week, to levels that meant it would cost as much
to insure MGIC's debt over five years as it would if it
"Freddie Mac has all the leverage, so my sense is that MGIC
is going to have to put in at least the $200 million (in new
capital) that Freddie wants and it could go beyond that," said a
hedge fund manager, who no longer trades in MGIC shares but has
been a long-time investor in other mortgage insurers. The
manager declined to be identified for this story.
S&P estimated that MGIC would only have about $100 million
in cash left over if it made the capital infusion. The company
had about $900 million in outstanding debt, at face value, at
the end of March.
Given the large claims on the holding company's slender
purse, Compass Point's Stewart said "liquidity risk at the
holding company remains a primary concern."
Private mortgage insurers like MGIC cannot count on the
capital market to raise cash. Shares of MGIC, together with
those of better-positioned rivals such as Radian Group and
Genworth Financial have lost close to 90 percent of
their value since the housing crisis began in 2007.
MGIC has offered three-way negotiations with Freddie and the
OCI but even it if were to agree to Freddie's terms, its
regulator has previously objected to suggestions that the
insurer use the new unit's capital to pay off claims of the old.
The OCI has previously said this would encroach on its turf.
Some analysts say Freddie can't push too hard, as hobbling
MGIC's lucrative new business could force it into run-off, where
it just manages down its old business, and leave it with not
enough money to pay out on past claims.
Previously optimistic analysts, like those at FBR Capital
Markets, have thrown in the towel and downgraded their rating on
Just one analyst now has a buy rating on the stock, down
from three a month ago. Six analysts have a hold, while one has
a "sell" rating, according to Thomson Reuters Starmine.