Triad Guaranty Insurance Corp. has 90 days to come up with a remediation plan in order to continue providing mortgage insurance for loans purchased by Freddie Mac, after analysts downgraded the company’s insurer financial strength.

Fitch, which had warned of possible downgrades of the ratings of Triad and other major private mortgage insurers, took action Wednesday after Triad’s parent company revealed in a regulatory filing that it had not been able to raise new capital in the face of mounting losses.

In their annual report to investors, Triad Guaranty Inc. executives said net losses and loss adjustment expenses increased by $278.7 million, to $372.9 million, with paid losses up 70 percent to $100.6 million.

The company’s risk-to-capital ratio shot up from 12.5-to-1 a year ago to 20.5-to-1 by Dec. 31 — nearly at the 22.1-to-1 limit established by the company’s creditors, and the 25-to-1 minimum required by most states.

Triad officials said they are considering a "run-off" plan under which a newly formed mortgage insurer would "acquire certain of Triad’s employees, infrastructure, sales force and insurance underwriting operations," and the company would cease writing new business.

With an estimated 6.4 percent market share in 2007, Triad is the smallest of seven major private companies that insure loans in which borrowers make down payments of less than 20 percent. But it’s not alone in its predicament.

Fitch analysts warned in February that MGIC Investment Corp., PMI Group Inc. and Radian Group Inc. also face ratings downgrades if they cannot raise capital to offset rising losses (see Inman News story).

Triad officials said Fitch’s downgrade of the company’s insurer financial strength rating from "AA-" to "BBB-" would give government-backed mortgage financers Fannie Mae and Freddie Mac the right to require lenders to cancel the company’s remaining insurance in-force "on a selective basis" and substitute the cancelled policies with new policies written by another insurer.

Freddie Mac officials said that rather than automatically subjecting Triad to additional capital requirements and operations restrictions imposed on "Type II" insurers, the company will have 90 days to submit a remediation plan for restoring its AA- rating.

"Freddie Mac will then determine, at its sole discretion, whether or not to impose the additional Type II requirements for mortgage insurers," the company said.

Freddie Mac and Fannie Mae are the ultimate purchasers of "a large percentage of the loans" insured by Triad, company officials said in their annual report.

Triad’s 10 largest customers accounted for 73 percent of the company’s new insurance written in 2007. The company’s single largest customer — now bankrupt American Home Mortgage — accounted for 22 percent of revenue, followed by Wells Fargo Home Mortgage (13 percent), Fannie Mae (10 percent) and Countrywide Credit Industries (10 percent).

Triad said 32 percent of its risk in force and 47 percent of risk in default is in "distressed markets" in California, Florida, Arizona and Nevada. The default rate in those markets was 5.7 percent in those markets at year end, compared with 3.5 percent in remaining markets.

"If the housing markets continue to decline at a steep rate or for an extended period of time in these distressed markets, we could experience additional adverse effects on our operating results and financial condition due to the large concentration of our business in these distressed markets," company officials warned.


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