Downgrade Hits Mortgage Insurers

Shares fall on worries about the declining housing market.
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Shares in mortgage insurers got hit Wednesday after a downgrade.

Steve Stemlach, an analyst at Friedman Billings Ramsey Group, cut his ratings on

PMI Group

(PMI)

,

MGIC Investment

(MTG) - Get Report

and

Radian Group

(RDN) - Get Report

to market perform from outperform.

He cited valuation concerns and "expectations for a longer-than-expected downturn in the credit cycle and a more severe level of losses owing to diminishing loss-mitigation opportunities." Shares of the group fell 1% to 2%.

"The recent spate of mortgage originators backing away from various affordability products will also put a negative bias on credit costs in the near term, although the longer-term implications are positive for the industry," the analyst wrote.

Mortgage insurers provide coverage to lenders and borrowers in case of loan default or event that would cause a credit loss.

In the latest hit to the mortgage industry,

Countrywide Financial

(CFC)

, the largest independent mortgage company, warned on Tuesday that rising delinquencies and defaults were spreading beyond the subprime industry into some so-called prime mortgage categories.

The Calabasas, Calif.-based lender's CEO, Angelo Mozilo, also said he doesn't see a housing recovery until 2009.

The news sent the stocks of mortgage lenders falling Tuesday. Shares of

IndyMac

(IMB)

,

Accredited Home Lenders

(LEND) - Get Report

,

Fremont General

(FMT)

,

NovaStar Financial

(NFI)

and

American Home Mortgage

(AHM)

dropped.

Earlier this year, dozens of firms that grant mortgages to consumers with poor credit histories experienced mounting losses from a rise in delinquencies and defaults on loan payments. The lenders were also hurt by lower demand from brokerage firms that bought the subprime loans and securitized them with the intention of re-selling them to investors. Investors have been backing away from the risky investments after seeing that borrowers are having difficulty repaying their loans.

At least two analysts downgraded Countrywide's stock on Wednesday.

FBR analyst Paul Miller, who lowered his rating to underperform from market perform, says the downgrade obtains "until we get a clearer picture of the credit outlook for the entire mortgage market." He said investors "need to get a handle on home price depreciation, especially in the California market."

Stemlach writes that because of the current credit environment, "we do not anticipate that the mortgage insurance stocks will be afforded valuations meaningfully above tangible book value."