MGIC (MTG) sounded the alarm in its earnings report Thursday, saying its primary regulator, the Office of the Commissioner of Insurance of the State of Wisconsin, or OCI, objects to one of the requirements Freddie Mac laid out when approving the insurer for mortgage operations in states where it has yet to obtain capital requirements waivers from state regulators.

The battle outlined in the quarterly report caused the company's stock to plummet 64% on Thursday.

The disagreement between the state regulator and Freddie Mac increases the risk of MGIC's state regulator in Wisconsin revoking or refusing to renew an order that allows the insurer to operate in the state through Dec. 31, 2013. The agreement with the state regulator gives the firm the ability to write new business even with its current risk-to-capital ratio exceeding the standard maximum limit of 25-to-1.

The desires of Freddie Mac and the Wisconsin insurance regulator have MGIC caught between the demands of two authorities that dictate when the firm can write new business, especially in an environment where MGIC's insurance operations have a risk-to-capital ratio of 30-to-1.

As previously noted, MGIC's Milwaukee regulator waived the firm's capital requirements, allowing them to write new business as long as MGIC "maintains regulatory capital that OCI determines is reasonably in excess of a level that would constitute a financially hazardous condition," according to the insurer's earnings report. OCI also demanded that MGIC Investment Corp., the insurer's parent company, make cash equity contributions to MGIC to ensure its liquid assets are at least $1 billion, the company noted in its quarterly earnings report.

Freddie Mac, on the other hand, greenlighted a plan for MGIC's new MIC (MGIC Indemnity Corp.) unit to write business in jurisdictions (other than Wisconsin) where it cannot obtain regulatory approvals. This approval was needed to help the insurer write new business to raise capital in states where it may not have regulatory approvals due to its high risk-to-capital ratio.

Freddie stipulated that MIC could write new business in these areas as long as the firm's holding company made a $200 million capital infusion to MGIC before Sept. 30. Freddie also said the firm needed to settle an ongong agreement with the government-sponsored enterprise over how pool policies should be interpreted. The parties have until Oct. 31 to resolve that particular issue.

In addition, Freddie stipulated that the Wisconsin insurance regulator needed to agree by Dec. 31 that MIC's capital will be available to MGIC for covering payments on MGIC claims.

OCI pushed back saying it "objected to this last requirement and others contained in the Freddie Mac approval because those requirements do not recognize the OCI’s statutory authority and obligations," according MGIC's earnings report.

The debate between the regulator and Freddie Mac puts MGIC's plan to raise capital through the writing of new insurance business in a catch-22.

"Depending on the level of losses that MGIC experiences in the future, it is possible that regulatory action by one or more jurisdictions, including those that do not have specific capital requirements, may prevent MGIC from continuing to write new insurance in some or all of the jurisdictions in which MIC is not eligible to insure loans purchased or guaranteed by Fannie Mae or Freddie Mac," the firm wrote. "If this were to occur, we would need to seek the GSEs’ approval to allow MIC to write business in those jurisdictions."

At the same time, the insurer needs to maintain agreements with both Fannie and Freddie, a situation made difficult by the current debate between Freddie and the Wisconsin regulator.

"If one GSE does not approve MIC in all jurisdictions that have not waived their capital requirements for MGIC, MIC may be able to write insurance on loans that will be sold to the other GSE or retained by private investors," MGIC said in its quarterly report. "However, because lenders may not know which GSE will purchase their loans until loan origination is complete and mortgage insurance has been procured, lenders may be unwilling to procure mortgage insurance from MIC. Furthermore, if we are unable to write business on a nationwide basis utilizing a combination of MGIC and MIC, lenders may be unwilling to procure insurance from us anywhere."