As the markets reel from renewed credit concerns, most of the mortgage insurers and mortgage bond insurers are taking yet another huge tumble.
Mortgage insurers like
are all posting year-to-date declines of over 70%, with share prices in the single digits fast approaching. Mortgage insurance policies are paid out to mortgage lenders when borrowers default on their debt.
Goldman Sachs' Andrew Brill cut his price targets for MGIC, PMI and Radian Friday, adding more pressure to the stocks. PMI and Radian were still in the red at midafternoon, even as the broad market recovers from the morning's swoon.
"With credit fundamentals continuing to erode quickly and no visibility to when and at what level losses stabilize, we continue to believe it is premature to be bullish," writes Brill, adding that he believes losses will continue for mortgage insurers into 2009.
The problem is that mortgage insurers' and bond insurers' business models are tied to all the disintegrating elements that characterize this credit crunch -- homeowners defaulting on loans and ratings agencies, Moody's Investors Service and Standard & Poor's with diminishing credibility for giving their stamp of approval to mortgage-backed securities and derivatives.
For the mortgage insurers themselves, origination is down, and defaults are up. Indeed the residential real estate market is in recession, with home prices off nearly 20% in two years. Earlier this week, the S&P/Case-Shiller home price index showed that home prices in the country's 10 largest cities fell 5% in August, the largest annual decline since the recession of 1991.
Brill writes "we have not seen the worst of the housing downturn and the rising losses have surfaced during a period of benign employment trends." He also notes that the ratings agencies which have already put many mortgage insurers on watch or given them negative outlooks, may soon slash the actual ratings. A high credit rating for an insurance company is essential, as they finance their capital-intensive business typically with short-term borrowings. A lower credit rating means its borrowings become more expensive.
Mortgage bond insurers such as
( ABK) and
were downgraded to neutral from buy by fellow Goldman Sachs analyst James Fotheringham also on Friday, sending their shares down sharply. MBIA is down about 6% in afternoon trading, while Ambac has slid over 12%. The stocks are down 51% and 71% year to date, respectively.
The companies take a "wafer thin" fee for insuring highly rated, namely triple-A, mortgages on the assumption they'll never default, says James Bianco, president of Bianco Research. "When there were no defaults, that was like free money for them."
But, triple-A has proven to be less than bulletproof, so shareholder confidence in the entire financial guarantee business is dim. Thursday, S&P reported that "event of default" notices were doled out to seven collateralized debt obligations tied to subprime mortgages. The affected CDOs had ratings ranging from triple-A to double-B-plus.
Fotheringham raises questions about these guarantor's capital base given the unpredictability of more CDO ratings downgrades or defaults.
"We have been surprised by the depth of downgrades so far, and we worry about the potential breadth of credit issues" beyond RMBS, he writes.
In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click
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