Triad Heads into Runoff, as Plans to Create New Insurer Fail

The credit crisis has claimed its first mortgage insurer.

On Thursday morning, Triad Guaranty Inc. (TGIC: 0.54 -8.47%) said that it had ended its negotiations with Lightyear Capital LLC to form a new mortgage insurance company, and Freddie Mac (FRE: 1.14 -1.72%) informed Triad that the appeal of its subsidiary’s suspension as an approved mortgage insurer had been denied. Both outcomes effectively put the company out of business; Triad said it will cease issuing commitments for mortgage insurance effective July 15.

The company’s stock tanked by more than 50 percent in early trading on the Nasdaq, as a result; shares were at $1.06, down 48 percent, when this story was published. CEO Mark Tonnesen said the decision to head into runoff was “difficult,” and that the company would continue to explore a possible sale of the company. But he clearly was less than optimistic on the chances of a purchase.

“We are not optimistic that any opportunities will surface,” he said in a press statement.

Triad plans to reduce its workforce by approximately 100 persons in the coming weeks, the company said, with Tonnesen saying that the company “has the resources and talent to manage an effective run-off.”

“We currently expect that our run-off will enable the payment of all legitimate policyholder claims, and we will dedicate ourselves to the success of the run-off plan as our number one objective,” he said.

Investors and rating agencies alike, however, have questioned whether the company’s existing claims-paying resources will be sufficient for the book of business it has already underwritten.

Fitch Ratings said Thursday after news of Triad’s demise broke that the company’s “margin of safety to meet policyholder obligations could become pressured if delinquency and loss development continue at a sustained pace.” The 2007 vintage, in particular, is proving problematic for Triad — Fitch said that last year’s vintage is defaulting at a “materially higher rate that the troubled 2006 vintage,” and that Triad’s 2007 vintage portfolio was performing worse than other mortgage insurers.

In Triad’s favor on the claims side, oddly enough, may be a preponderance of fraudulent loans. Fitch noted that a large number of potential claims on mortgage insurance policies for the 2007 vintage may be determined to be ineligible for coverage — especially for Alt-A loans — leading to high rescission and claim denial activity.

Triad posted a net loss of $150 million during the first quarter, as rising credit costs pulled the troubled insurer into the red.

Disclosure: The author held no positions in TGIC or FRE when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.