The private insurers that cover $700 billion of U.S. mortgages are facing an onslaught of foreclosures. The big three—MGIC, Radian, PMI—are at risk.
The housing market has been a cruel goddess, destroying the finances of millions of Americans and driving the economy and financial system to near collapse.
Now the capricious deity threatens to claim even more victims, as U.S. housing prices fall to new post-bubble lows and the backlog of foreclosed properties builds ominously.
The next domino likely to topple is the so-called private-mortgage-insurance industry, which permits buyers to purchase homes without making a full 20% down payment. Private mortgage insurance covers the first 25% of a mortgage's value against default, plus accrued interest. Some $700 billion of U.S. mortgages carry such insurance, with most of it owned by Fannie Mae and Freddie Mac and backed by the federal government.
The most at risk are the three companies that specialize almost exclusively in the coverage: MGIC Investment (NYSE: MTG - News), Radian Group (NYSE: RDN - News) and PMI Group (NYSE: PMI - News). The other chief participants in the industry—Genworth, United Guaranty and Republic Mortgage Insurance—have the distinct advantage of having corporate parents with diversified business lines and more financial resources with which to buttress their businesses.
But the three big monoline insurers—MGIC, Radian and PMI, which comprise 60% of the industry, according to research outfit Inside Mortgage—appear woefully undercapitalized to meet the claims that loom over the next couple of years, as defaulted mortgages residing in their inventories rumble through the foreclosure pipeline to eventual insurance payoffs.
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