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Standard & Poor’s Ratings Services announced that it has lowered its counterparty credit rating on four U.S. Mortgage insurers as follows:
MGIC Investment Corp. to ‘BBB’ from ‘A-‘ and its counterparty credit and financial strength ratings on the mortgage insurance subsidiaries (MGIC) to ‘A’ from ‘AA-‘. The ratings were removed from CreditWatch, where they were placed on Jan. 24, 2008, with negative implications. The outlook is negative.
Old Republic International Corp. (ORI) to ‘A’ from ‘A+’ and its counterparty credit and financial strength ratings on ORI’s core subsidiaries to ‘AA-‘ from ‘AA’. The ratings were removed from CreditWatch, where they were placed on Feb. 25, 2008, with negative implications. The outlook is negative.
PMI Group Inc. to ‘BBB+’ from ‘A’ and its counterparty credit and financial strength ratings on PMI Group’s mortgage insurance subsidiaries in the U.S. (PMI) and Europe (PMI Europe) to ‘A+’ from ‘AA’. The ratings were removed from CreditWatch, where they were placed on Feb. 13, 2008, with negative implications. The outlook is negative.
Radian Group Inc. to ‘BBB’ from ‘A-‘ and its counterparty credit and financial strength ratings on Radian Group’s mortgage insurance subsidiaries (Radian MI) to ‘A’ from ‘AA-‘. These ratings remain on CreditWatch, where they were placed on Feb. 13, 2008, with negative implications.
“The downgrades reflect weaker-than-expected results for the fourth quarter of 2007 and the continued deterioration in key variables that influence claims for mortgage insurance,” explained S&P credit analyst James Brender.
The bulletin added: “When we resolved the CreditWatch status of several mortgage insurer ratings on Nov. 21, 2007, we stated that if unemployment rose above 6 percent, incurred losses for all mortgage insurers would be significantly higher than our expectations. Our most recent macroeconomic forecast shows unemployment reaching 5.8 percent in 2009, and there is considerable uncertainty in the job markets. The deterioration in the housing markets has also been worse than our expectations. Now, we believe median home prices will decline 20 percent from the peak in 2006. By contrast, the forecasts we used in November 2007 assumed a decline of 11 percent.”
However S&P said that “as result of the deterioration in the housing and job markets,” it now believes that “mortgage insurers’ operating results for 2008 and 2009 will compare unfavorably with our previous expectations. Our current forecasts predict that most companies will not generate an underwriting profit until 2010, but individual results will vary.”
On the upside S&P said it considers that the mortgage insurers have enough “capital adequacy and available liquidity “to satisfy claims from existing resources” in the near term. However, “some companies will likely need to raise additional capital to support their current level of new business because claims from existing business will deplete some capital,” S&P added.
In a further explanation, S&P indicted that all of the “mortgage insurers that we downgraded today” have capital adequacy ratios that are above S&P’s minimum for an ‘AAA’ rating. “However, we expect the capital adequacy ratios to decline in 2008 because of operating losses. The insurers have very liquid investment portfolios, but the financial flexibility of some of their holding companies has weakened.”
.Brender added: “Despite the challenging environment for mortgage insurers, there are some long-term positive factors for the industry. The most important of these is the rigor the industry has shown in reducing its exposure to higher risk products, such as mortgages with reduced documentation or high loan-to-value ratios or to properties in declining housing markets.”
As positive factors, S&P noted: “Mortgage insurers have also benefited from a trend toward higher FICO scores and more fixed-rate mortgages.” They have also seen “greater demand for mortgage insurance, higher persistency, and lower expense ratios. These could make the 2008 vintage profitable despite significant home price depreciation.
The initial consequence, S&P stated, would require Fannie Mae and Freddie Mac (collectively, the government-sponsored enterprises; GSEs) to conduct a review of the mortgage insurers that now have ratings below ‘AA-‘ and decide whether they are still eligible to insure mortgages sold to the GSEs.
S&P said: “In the short term, replacing the capacity provided by those mortgage insurers whose ratings have been lowered below ‘AA-‘ “would be extremely difficult.” S&P estimates that” firms now rated below ‘AA-‘ accounted for 58 percent of the industry’s flow market share in 2007.
“The other mortgage insurers do not have the capital to absorb all of this volume,” S&P added, noting that it would “likely downgrade any mortgage insurer that loses its eligibility to insure mortgages sold to the GSEs.”
In addition to the rating actions on mortgage insurers, S&P said it has also lowered its counterparty credit and financial strength ratings on PMI Guaranty Co. to ‘A+’ from ‘AA’, removed them from CreditWatch negative, and assigned a negative outlook. Standard & Poor’s also placed its ‘AA’ counterparty credit, financial strength, and financial strength ratings on Radian Asset Assurance Inc. on CreditWatch negative.
S&Pwill hold a telephone conference call today, April 9, 2008, at 11:00 a.m. EDT to discuss these rating downgrades and the outlook for the U.S. mortgage insurance sector. The live call-in numbers for this call are (1) 210-839-8781 (U.S.) and (44) 20-7108-6390 (U.K.); the conference ID for this call is #4191429, and the passcode is SANDP.
A replay of this call will be available starting about an hour after the call concludes through Wednesday, April 16; the replay number will be (1) 203-369-1649. Complete ratings information is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor’s credit ratings, research, and risk analysis, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor’s public Web site at: www.standardandpoors.com; select your preferred country or region, then Ratings in the left navigation bar, followed by Credit Ratings Search.
Source: Standard & Poor’s