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Mortgage Modifications Benefit Mortgage Insurers: Analysts

NEW YORK ( TheStreet) -- The U.S. Treasury Department's latest changes to the mortgage modification program will deliver significant benefits to mortgage insurers, according to analysts at FBR Capital Markets.

" Treasury's release on Friday points towards attaining greater GSE participation, particularly given higher incentives for modifications that include principal reduction. Recall: GSE modification is not a claimable event for MIs, so greater participation from GSEs should lead to more delinquent borrowers becoming current and lower incidences of loss for MIs," said Steve Stelmach and Edward Mills wrote in a report.

On Friday, the Treasury Department released an updated guidance for the Home Affordable Mortgage Modification Program (HAMP), extending the program by another year to the end of 2013 and targeting an increase in principal reductions.

The government will now triple the incentives paid to servicers who reduce principal. Servicers will be paid between 30 cents to 63 cents for every $1 of reduced principal on early-stage delinquent loans compared to 10 cents to 21 cents earlier. For loans that are more than 6 months delinquent, the compensation has been increased to 18 cents from 6 cents earlier.

More importantly, the revised program will also pay Fannie Mae (FNMA) and Freddie Mac (FMCC) incentives to reduce the principal on loans.

Greater participation from Fannie Mae and Freddie Mac in principal reductions could deliver a $4 billion benefit to the mortgage insurance industry, according to the analysts assuming the latest program is atleast as successful as the earlier version.

The analysts point out that loan forgiveness benefits mortgage insurers in one of two ways. They could either completely avoid a claim or at the very least it could also lower the claimable amount, as insurance now applies to the newly modified loan amount, not the original loan value.

MGIC Investment (MTG - Get Report) and Radian Group (RDN - Get Report) may be among the companies that benefit. Shares of Radian were up nearly 2% after being down by more than 5% earlier in the session on Monday. Shares of MGIC were also rebounding, down about 1% after declining nearly 6% earlier in the session.

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