The fate of a planned merger of mortgage insurers MGIC Investment Corp. and The Radian Group Inc. may be settled in court, as both companies try to assess their losses in a subsidiary, C-BASS LLC, which is invested heavily in subprime mortgages.

At the end of July, both companies warned they could lose their entire $1 billion investment in Credit-Based Asset Servicing and Securitization LLC, or C-BASS, a limited liability company jointly owned by MGIC, Radian and the management of C-BASS.

At the time, C-BASS said it was looking for cash from investors and struggling to meet $260 million in margin calls.

On Aug. 7, MGIC announced that because of the potential losses at C-BASS, it had made a preliminary determination that it was not obligated to complete the merger. MGIC said a final decision would be made by its board of directors after further analysis by the company’s management. MGIC said it had requested additional information from Radian.

Radian maintained MGIC was obligated to go through with the merger, the terms of which were spelled out in a Feb. 6 agreement.

Today, MGIC announced that it had filed a lawsuit to force Radian to provide the information MGIC says it needs to complete its analysis of whether it’s obligated to close the merger.

Radian quickly issued a statement saying the company has continued to provide MGIC with information, and was “disappointed” the lawsuit had been filed.

Radian said it is “compelled to carefully assess” MGIC’s requests for information, to ensure Radian doesn’t provide proprietary information that would give MGIC “an unfair competitive advantage in the event that MGIC decides that it does not have an obligation to complete the merger.”

MGIC’s principal subsidiary, Mortgage Guaranty Insurance Corp., claims to be the largest provider of private mortgage insurance coverage, with $186.1 billion primary insurance in force covering 1.3 million mortgages as of June 30.

News of potential losses in C-BASS led Fitch Ratings to downgrade the senior debt rating of MGIC Investment Corp. from A+ to A, and the insurer’s financial strength of subsidiaries Mortgage Guaranty Insurance Corp. and MGIC Australia Pty Ltd. from AA+ to AA.

MGIC calculated that its investment in C-BASS was about $516 million as of June 30, including $466 million of equity and an additional $50 million through an unsecured credit facility, which was fully drawn.

In its most recent quarterly report to investors, Radian said its total investment in C-BASS was about $518 million as of June 30, including $468 million of equity and $50 million under an unsecured credit facility provided to C-BASS on July 19.

According to the report, mortgage insurance generated about 12 percent of Radian Group’s net income in the first six months of 2007. In the U.S., Radian provides private mortgage insurance and risk management services to mortgage lenders through subsidiaries Radian Guaranty Inc., Amerin Guaranty Corp. and Radian Insurance Inc.

On July 31, Fitch Ratings placed the long-term debt rating of Radian Group and the insurer financial strength ratings of all of its insurance subsidiaries on Ratings Watch Negative.

Standard & Poor’s Ratings Service and Moody’s have affirmed the ratings of Radian Group and its insurance subsidiaries and the senior debt ratings of Radian Group.

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