Private mortgage insurer MGIC Investment Corp. said fourth-quarter losses totaled $1.47 billion, as the company paid out more claims on bad loans and boosted projections of future claims on loans that were bundled up as collateral for securities sold to Wall Street investors.
Although MGIC executives expect the company to remain in the red in 2008, they say it will remain adequately capitalized to pay claims.
“Despite this difficult operating environment, the company has adequate capital to meet its claim obligations and … there have been significant improvements to the company’s business fundamentals, including higher persistency, increased use of mortgage insurance, higher premiums for certain segments of business and improved credit standards, which should benefit the company financially over the long term,” the company said in a regulatory filing.
New insurance written in the fourth quarter totaled $24 billion, compared with $15.5 billion a year ago, and total revenue for the year was up 15 percent, to $1.69 billion. Despite that, MGIC’s losses for the year totaled $1.67 billion, compared with net income of $564.7 million for 2006.
The losses included MGIC’s loss of its entire investment in a joint venture, C-BASS, which invested in securities backed by subprime mortgages. MGIC said its after-tax losses in the joint venture totaled $269.3 million for the year. The losses at C-BASS also derailed MGIC’s plans to merge with a competitor, Radian Group Inc. (see Inman News story).
MGIC paid $870 million in claims in 2007, up 35 percent from a year ago. The $284 million in claims paid during the fourth quarter represented an 81 percent increase from a year ago.
The Milwaukee-based insurer was also forced to boost loss reserves by $1.2 billion to cover an estimated $3.5 billion in expected losses on Wall Street bulk transactions, which are loans that MGIC knew would serve as collateral for securities sold to investors. The bulk transactions typically involved a higher percentage of adjustable-rate mortgage (ARM) loans and lower credit scores than other loans MGIC insured.
Analysts at Standard & Poor’s Ratings Services last month said subprime loans packaged into securities were performing worse than expected, and boosted their loss projections for mortgage and bond insurers by 20 percent (see story).
MGIC had already set aside $1.4 billion to cover its expected future paid losses and expenses, and can count on $900 million in additional premiums to offset future losses. But with the company now expecting future losses to hit $3.5 billion, it was forced to set aside an additional $1.2 billion for loss reserves during the fourth quarter.
During the fourth quarter, the company stopped insuring bulk transactions unless lenders planned to hold the loans for investment, or the loans met guidelines established by Fannie Mae or Freddie Mac.
MGIC is also tightening its standards California, Florida, Arizona and Nevada and 26 markets in 18 other states where home prices are falling. As of March 3, MCIG will no longer insure loans with down payments of less than 5 percent in the 30 restricted markets, which include Denver; Washington, D.C.; Atlanta; Honolulu; Chicago; Baltimore; Boston; Detroit; Minneapolis; Newark, N.J.; New York City; Portland, Ore.; and Vancouver, Wash.
A credit score of 680 or better will be required to obtain private mortgage insurance from MGIC in restricted markets on loans with down payments of less than 10 percent. In the rest of the country, MGIC will insure loans with down payments of less than 5 percent, but only if borrowers have credit scores of 680 or better (see story).
MGIC insured 1.44 million mortgage loans at the end of 2007, about one in five of which were made to borrowers who provided reduced documentation or had credit scores of less than 620.
The company saw the delinquency rate for primary insurance in force rise from 6.1 percent in the final quarter of 2006 to 7.4 percent at the end of 2007. While the delinquency rate on loans made to borrowers with credit scores of 620 or above increased from 3.7 percent to 4.3 percent during that time, the deterioration of credit quality in subprime and reduced-documentation loans was more dramatic.
Delinquencies on loans classified by MGIC as subprime (with credit scores of less than 575) rose from 26.8 percent in the fourth quarter of 2006 to 34.1 percent in the final quarter of 2007. Delinquency rates on reduced-documentation loans nearly doubled during the same period, rising from 8.2 percent to 15.5 percent.
In an attempt to stem rising claims, MGIC slashed its coverage of ARM loans in 2007 from 10 percent of new primary insurance written in 2006 to 3 percent during 2007. But the percentage of loans with loan-to-value ratios exceeding 95 percent increased from 34 percent in 2006 to 42 percent in 2007. During the final quarter of the year, loans with down payments of less than 5 percent constituted 38 percent of new primary insurance written.