S&P Cuts Four Major Mortgage Insurers; Projects Worsening Housing Slump
Standard & Poor's Ratings Services said late Tuesday that it had slashed the ratings of key mortgage insurers amid growing economic uncertainty and fresh expectations that the U.S. housing slump would be deeper expected. The move at S&P comes less than a week after rival Fitch Ratings was the first to cut a major mortgage insurer, Triad Guaranty. Mortgage insurers have been hit hard as cure rates have touched all-time lows, and claims have increased dramatically amid a historic surge in borrower defaults. Insured defaults rose 38 percent in February, according to the most recent statistics provided by the Mortgage Insurance Companies of America, an industry trade group. (MTG), The PMI Group, Inc. (PMI), Radian Group Inc. (RDN), and Old Republic International Corporation (ORI); the table to the right summarizes the downgrades of each. PMI responded immediately to news of the downgrades, saying that the downgrade would not affect its claim-paying resources. "The private mortgage insurance industry and PMI are going through challenging times as we navigate the current U.S. housing market," said Steve Smith, chairman and CEO at the PMI Group. "PMI's capital position and the resources we have available to pay claims have not been affected by S&P's ratings decisions." MGIC CEO Curt Culver echoed a similar sentiment, expressing disappointment with the downgrade, but emphasizing that the company's capital adequacy remained well above S&P's minimum ratio for a AAA rating. Radian said it would seek "a broad range of alternatives to strengthen its capital position," and that it would look to raise capital by offering common stock. The insurer also said that it was discussing amendments to its terms with creditors, which likely required maintenance of a certain rating level. Housing slump worse than originally thought "Our most recent macroeconomic forecast shows unemployment reaching 5.8 percent in 2009, and there is considerable uncertainty in the job markets," said credit analyst James Brender at Standard & Poor's. "The deterioration in the housing markets has also been worse than our expectations. Now, we believe median home prices will decline 20 percent from the peak in 2006." S&P had earlier expected a peak-to-trough decline of 11 percent, according to Brender. PMI, Radian, and MGIC now have 90 days to submit a remediation plan to both Fannie Mae and Freddie Mac, explaining how each expects to regain a AA- rating, the minimum required by the GSEs to maintain so-called Tier One status with the mortgage giants. S&P said that further downgrades would be likely for any insurer that fails to remain eligible to underwrite product for either Fannie or Freddie. The agency also warned that replacing the capacity of the three impacted insurers would "be extremely difficult," should it become necessary to do so. The big three represented 58 percent of the mortgage industry's flow market share in 2007, and the insurers that remain above the AA- rating level simply don't have the capacity to absorb all of the excess volume. For more information, visit http://www.standardandpoors.com. Disclosure: The author owned no positions in MTG, ORI, PMI, or RDN when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.