Mortgage Winners: MGIC, GenWorth, Radian

MILWAUKEE, Wisc. ( TheStreet) -- It might seem hard for a mortgage company to lose more money in the fourth quarter than many Street analysts expect and still end the day up by close to 10%, but MGIC Investment ( MGT) engineered that feat on Tuesday.

Shares of MGIC Investments ended Tuesday with a gain of 9.6%, or 58 cents to $6.64, and almost three times the mortgage company's normal level of trading -- 11.6 million shares traded versus an average daily level of close to 3.9 million shares traded.

The fourth quarter earnings report from MGIC Investment, the largest U.S. mortgage insurer, led to a rally among similar mortgage companies.

Radian Group ( RDN) was up 4%, and had daily trading volume 2 million share above its normal level.

Genworth Financial ( GNW), which is a diversified financial company, but whose mortgage business has been the key performance laggard, ended the day up by 1.3%, with 17.5 million shares traded, versus an average daily trading volume of just under 11 million shares. GenWorth hit a 52-week high during Tuesday's trading session.

PMI Group ( PMI), one of MGIC Investment's competitors, was up 5%, too.

At the same time as the mortgage rally, the financial and insurance sectors were both down on Tuesday.

It all begs the question: Did the market wake on Tuesday morning and discover that the mortgage nightmare was just a dream, and mortgage companies were turning the corner toward profitability?

Not exactly.

It wasn't fourth-quarter profits that moved the needle in mortgage investors outlook on Tuesday, but a slowing in the rate of mortgage delinquencies reported by MGIC. In fact, the fourth quarter was the tenth-consecutive quarter during which MGIC lost money.

Net loss for the fourth quarter was $2.25, although even that net loss looked much better due to a one-time tax benefit of $257 million. The actual loss without the one-time tax gain was $4.49, versus a Street estimate of a $3.35 net loss per share.

There were additional negative items in the MGIC fourth quarter: revenue fell slightly, net premium writing was down by $74 million, and the percentage of delinquent loans was up again.

Still, none of that seemed to matter in comparison to the slowing rate of delinquencies, and MGIC management use of the term "burnout" when describing the delinquent mortgage loan pipeline headed into 2010.

Michael Grasher, analyst at Piper Jaffray, said today was the first time that the word "burnout" was used in relation to the level of delinquencies, and it is clear that 2007 vintage bad mortgages are slowing, and in key geographies. Grasher said this was a notable statement from MGIC management, because they have tended to be conservative in the past, and he specifically has tried to push the envelope with MGCI management previously to provide an outlook as positive on delinquency levels as they finally did on Tuesday.

However, Grasher is not with the bulls saying that bellwether MGIC has turned the corner to profitability. "This quarter was $170 million worse than we modeled in terms of the total level of bad mortgages, and that is still going higher," Grasher said.

Of course, the fourth-quarter earnings are backwards looking, while a slowing rate of delinquencies is a leading indicator. That cannot be understated. And fourth quarter earnings in the mortgage group are typically the weakest, so that seasonality may have also helped to push shares higher today.

Nat Otis, of Keefe, Bruyette & Woods, said, "MGIC lost a little more money than we expected, but that was secondary to the improving delinquent loan outlook." He noted that MGIC is not only the biggest of the mortgage insurers, but the first to report, and first one to report that delinquencies were slowing more than expected.

"There's some positive momentum in the space now," Otis said, adding that most companies in the mortgage space have a similar book of business, so it is fair to assume that delinquency rates may be declining in the upcoming earnings report from GenWorth and Radian, too.

Sanford Bernstein analyst Suneet Kamath, who covers Genworth, said there was no other reason for GenWorth to outperform life insurance today than the positive indicator from MGIC. "Any positive sign is a big sign, to the extent that the slowing is a positive indicator for the level of future losses," Kamath added, though he stressed that he does not cover MGIC specifically.

Matt Howell, an analyst with Macquarie Securities, went further than most of the mortgage analysts in his bullish outlook: "This is a sign that MGIC will turn the corner to profitability, and that will be true for all of the peer companies, including Radian. The books have seen their peak defaults," Howell said.

Maybe the peak defaults have been reached, but has the economic situation improved enough to make the call of a return to profitability in the sector?

Several analysts stopped short of that confidence, saying that even with the slowing rate of delinquencies, the U.S. employment market weakness is not yet showing the improvement required for a mortgage recovery.

KBW's Otis provided a note of caution specific to the positive delinquency outlook. Otis wrote in a research note on Tuesday: "We would expect the market to view this quarter's results positively, given that the rate by which delinquencies have been increasing slowed this quarter. That said, we remain cautious in our assessment of the company's credit position, as prime delinquencies are only slightly below double-digit growth levels entering 2010."

MGIC's overall delinquency inventory increased by 6.3% sequentially in the fourth quarter, slightly below KBW's expectation for a 7.2% increase. Prime delinquency growth slowed to 9.3%, from 15.6% last quarter. KBW also noted that new notices of default decreased to 61,114 in the fourth quarter, from 66,783 in the third quarter, and 63,067 in the second quarter.

"While we wouldn't yet classify this as a material decrease in new notices, it at least moved in the right direction this quarter and we will monitor developments to see if this can become a sustainable trend," the KBW analyst wrote.

The delinquency outlook was improved, but caution still seemed to be the rule on Tuesday, after MGIC led the mortgage rally.

"Do I think they've turned the corner? Not so fast," said Piper Jaffray's Grasher. "There is still a high level of uncertainty, and my biggest concern is the employment picture. If people don't have jobs, they can't pay their mortgage," Grasher cautioned.

-- Reported by Eric Rosenbaum in New York.

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