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Downgrade Dumps MGIC

A merger of mortgage insurers continues to attract doubters.

MGIC Investment

(MTG) - Get MGIC Investment Corporation Report

plunged 16% after JPMorgan Chase downgraded the stock over concerns about its potential merger with

Radian Group

(RDN) - Get Radian Group Inc. Report

.

JPMorgan Chase analyst George Sacco cut his rating on MGIC to sell from buy, saying the merger of mortgage insurers will weigh on the stock.

"The overhang from the proposed Radian merger, combined with weak near-term fundamentals, will likely drive underperformance from MGIC stock until the merger issues are resolved," Sacco writes in a note.

In addition, higher credit costs and rising claim rates will pressure MGIC Investment's earnings in the second half of the year, he said.

MGIC Investment shares have risen 26% this week "largely by the unwinding of short positions following the announcement of MGIC that it believes it may be able to abandon its merger with Radian," Sacco adds. But he says uncertainty over whether the merger will close is "likely to reverse this trend."

Shares of MGIC Investment fell $5.92 to $35.87. Radian's shares fell $1.99, or 10%, to $17.46.

MGIC and Radian agreed in February to an all-stock merger then valued at $4.7 billion. Regulators and shareholders of both companies have approved of the deal, which is supposed to close this quarter.

But earlier this week, MGIC Investment said it was "not obligated" to complete a deal with Radian in light of the impairments discovered at the companies' joint venture, Credit Based Asset Servicing and Securitization, otherwise known as C-Bass.

The firms said in a public statement last week that they may have to write off their investments in C-Bass, a subprime mortgage investor, after it saw "unprecedented losses" in its investment in securities related to borrowers with questionable credit.

Radian said that it disagreed with MGIC's assertion that it didn't need to complete the merger in light of the C-Bass impairment.

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The stocks of other insurers that have ties to the mortgage industry were also falling on Friday. Shares of

PMI Group

(PMI)

, a private mortgage insurer, fell 10%. Bond insurer

MBIA

(MBI) - Get MBIA Inc. Report

fell 3%.

Clouding the air was the general bearish sentiment as the mortgage industry and credit markets further deteriorated.

Countrywide Financial

(CFC)

and

Washington Mutual

(WM) - Get Waste Management, Inc. Report

each warned on Thursday that the freeze in the market for nonprime mortgage securities could significantly hit earnings.

"Longer term, we believe that strong growth of insurance in force will be a great catalyst for the stock, but we believe it is becoming increasingly important that MGIC is not burdened with Radian in order to survive this mortgage cycle in good shape," Sacco writes.