MGIC Loses $97.9 Million in Q2; Early Trouble in 2008 Vintage?

It can be a little too depressing to continually trudge out bad news. At least, that seemed to be the lesson of a second quarter earnings report released Thursday by MGIC Investment Corp. (MTG), which said that it lost $97.9 million during the quarter as foreclosures continued to soar; the company, however, offered investors optimism over its long-term prospects as tightened underwriting guidelines and increased premiums mean fewer bad loans and more money per policy on the books in the future. The quarterly loss, equal to $.79 per diluted share, compared to earnings of $76.7 million, or $.93 per diluted share, in the year-ago period. Revenues rose to $424.5 million, up 15 percent from $369.0 million in the second quarter of 2007, the company said. In a conference call with investors, CEO Curt Culver said the company would likely come in on the lower end of previous loss guidance, suggesting paid claims would be closer to $1.8 billion for 2008 than $2 billion -- but not because default activity was tapering off. "The reality is that the change has been slowed due to the various state and lender foreclosure moratoriums, servicing delays, fraud investigations, mitigation opportunities and a lack of capacity of our court system," he said. Which is telling -- it's not just servicers that are backlogged. It's the courts, as well. Collateral performance raises questions on 2008 vintage Delinquencies continued to jump upward, portending future paid claims: the percentage of loans that were delinquent at the end of June was 8.6 percent, compared to 7.45 percent at the end of June and 6.11 percent the end of last year. Much of the company's worst-performing loans are those that had insurance underwritten in a so-called bulk portfolio: pools of mortgages involved in securitization activity on Wall Street, rather than direct policies. Larry Pierzchalski, MGIC's chief risk officer, told analysts that the company sees delinquencies in its portfolio peaking at the end of this year -- but also said that the peak could come early next year as well. Also telling on the call were remarks by Mark Zimmerman, investor relations, that suggested the 2008 book of business will likely continue to perform poorly; we've heard from industry analysts for months that originations in the first half of 2008 are supposed to be the best the industry has ever seen. Zimmerman countered that thinking, saying "the first quarter will be the least profitable the business will do in '08, because you still had an overhang of the '07 guidelines that we committed on. As the company and as an industry, I think you will see this in every company and our business." The numbers appear to be bearing that out, as well. At MGIC, delinquencies increased from .26 percent last quarter to 1.11 percent of 2008 originations by June; it's early in the game, to be sure, but that's also a jump of 326 percent in one quarter on originations that were supposed to represent stronger underwriting. Data on comparative trajectories for previous vintages at MGIC was not available when this story was published, but it's instructive to note that by September of last year, overall delinquencies on the 2007 vintage (not just those mortgages insured by MGIC) were just below 3 percent. If current trending is any indication, MGIC's 2008 delinquencies would be above that level in the same time frame. Food for thought as we roll into the third quarter. Disclosure: The author held no direct positions in MTG when this story was written, although indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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