NEW YORK ( TheStreet) -- Mortgage insurers are still licking their wounds from the subprime crisis, but big name investors are clearly watching the sector closely in anticipation of a rebound. Genworth Financial ( GNW - Get Report), while also sells life insurance, saw hedge funds Baupost Group, Greenlight Capital and Och-Ziff Capital Management Group ( OZM) initiate stakes in the company during the second quarter. Not all took a bullish view, however, as both Soros Fund Management and Third Point sold out of stakes in the insurer. Radian Group ( RDN - Get Report), shares of which are up 43.59% year to date, has also attracted interest from the smart money crowd, with Och-Ziff, Oaktree Capital Management ( OAK - Get Report) and SAC Capital trading in and out of stakes in the company over the past two quarters. MGIC Corp ( MTG - Get Report), another mortgage insurer, has attracted less attention from the top hedge funds, though some lesser-known investors with solid reputations such as Hudson Bay Capital Management and Wolverine Asset Management have been active in the name. Genworth and MGIC have been allowed to write new business even though their risk-to-capital ratios have exceeded the 25-to-1 ratio that had been viewed as inviting regulatory intervention. Radian has indicated it will exceed that level later this year. This regulatory lenience has led Keefe Bruyette & Woods analyst Bose George to assume that "the existing players will survive." Still, George isn't recommending either Radian or MGIC (he doesn't cover Genworth), because he believes there is too much uncertainty surrounding the potential performance of insurance they wrote during the housing boom. But assuming these companies survive, they'll have an strong opportunity to profit from a housing rebound, argues BTIG analyst Mark Palmer in a note published last week reiterating his "buy-rating" on Genworth. Palmer notes mortgage insurers went through a similar period of consolidation in the mid-1980s and the survivors subsequently thrived. He points to two new entrants in the mortgage insurance industry, Essent Guaranty and NMI Holdings, as evidence of the profit potential for private mortgage insurers. An important catalyst for a rebound in the industry is likely to come from new mortgage regulations. A February proposal from the Federal Housing Finance Agency stated that "while some mortgage insurers are facing financial challenges as a result of housing market conditions, others may have the capital capacity to insure a portion of the mortgage credit risk currently retained by
Fannie Mae and Freddie Mac. This could be accomplished through deeper mortgage insurance coverage on individual loans or through pool-level insurance policies."
FBR Capital Markets analyst Ed Mills noted in a report last week that both an announcement from the Treasury Dept. and an accompanying statement from FHFA regarding the accelerated wind-down of Fannie Mae and Freddie Mac cited the FHFA's February proposal. He saw those citations as a bullish sign for private mortgage insurers. KBW's George believes it is likely to be at least a year before any the government formalizes any rule creating a bigger role for mortgage insurers. In the meantime, unwelcome surprises in the legacy books of the publicly-traded mortgage insurers could send their shares down sharply. For those willing to be patient and with a high tolerance for risk, however, the payoff looks to be substantial. -- Written by Dan Freed in New York. Follow this writer on Twitter.