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NEW YORK, Jan 21 (Reuters) - MGIC Investment Corp (MTG.N) may need to raise new capital in order to avoid breaching terms in its bank loan agreements, and difficulties in raising the funds could push the U.S. mortgage insurer into default, according to credit research firm CreditSights.

Milwaukee-based MGIC said on Tuesday its loss in the fourth quarter narrowed and that it does not expect to post a profit this year. For details, see [ID:nN20323889]

"Going forward we expect results to remain under intense pressure," CreditSights analysts Rob Haines and Joseph Di Carlo said in a report issued late on Tuesday.

Weaker results will result in MGIC potentially violating terms in its debt that are based on the company's net worth and its risk-in-force-to-capital ratio, they said. This ratio is defined as the company's net risk-in-force, or total potential exposure to claims, divided by qualified statutory capital.

"We think MGIC will need to raise capital as soon as the second quarter of 2009 if it is to avoid tripping its bank line covenants," CreditSights said. It added that "given market conditions, we expect MGIC will find it extremely difficult to raise sufficient capital within that time period."

MGIC has $200 million drawn from a $300 million revolving credit facility that matures in March, 2010, in addition to $200 million of senior debt maturing in September 2011 and $300 million of senior notes due in November 2015.

"While MGIC currently has sufficient cash at the holding company level to cover the outstanding balance on its revolver, a pay down would leave liquidity constrained to a point where bankruptcy could become inevitable," the analysts added.

The insurer said on a conference call that it had around $390 million of cash at the holding company level, which would leave it with $190 million in cash after paying down the $200 million credit facility, and $500 million in outstanding debt, CreditSights said.

If MGIC does not succeed in raising new capital, it may also fall below minimum regulatory capital requirements, the analysts said.

"State law mandates that an insurer cannot write any new business once it exceeds the 25 times risk-to-capital ratio level," they said. MGIC's ratio has increased to 16 times and, "we expect the ratio to continue to trend higher during 2009, barring a successful capital raise." (Reporting by Karen Brettell; Editing by Dan Grebler)


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Company out of Chicago just put in $15 million or so...boy are they going to get screwed. OR there is some back room deal in the works.

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Company is Old Republic, more or less a friendly competitor, much better run, and in a position to pick up the pieces of MGIC when it fails.  Being the major stockholder its looking to future!  

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Easy Money | How the subprime market unraveled

Mortgage insurance CEO would do it all over again

MGIC paying dearly for underwriting risky loans

If Curt Culver had to do it all over again, he would - and then some.

The chief executive of MGIC Investment Corp., the nation's biggest private mortgage insurance company, offers no apologies for his company's decision to insure billions of dollars worth of subprime mortgages and other high-risk loans during the past decade, a decision that in retrospect seems to have been one of many contributors to the subprime mortgage crisis.

"We should have done more," he said in a recent interview. "It was a money-making machine for the company."

But when that machine broke down, it left MGIC awash in red ink, with a loss of nearly $1.7 billion in 2007 - virtually wiping out its combined profits from the three previous years. It has lost $245.6 million so far in 2008.

MGIC is worth $6 billion less today than it was at the end of 2004, as the company's shares plummeted from the $70s to $3.88 at the close of trading Friday. Its market value has fallen from $6.6 billion to $485 million.

And Culver acknowledges he cannot predict how bad things may still get for the Milwaukee-based company.

"We don't have a great deal of transparency in saying how long will this last," he said.

MGIC was the pioneer in the mortgage insurance business, having created the category when Max Karl founded the company in 1957.

Today, banks and other lenders typically require homebuyers to purchase mortgage insurance from a company such as MGIC if their down payment totals less than 20% of the purchase price; that way, the lender is protected if the borrower defaults on the loan.

It can be a lucrative business, and MGIC was able to make it even more lucrative by charging higher premiums for insuring riskier loans, known in the industry as "bulk business." The category, which MGIC began aggressively pursuing about a decade ago, includes no-documentation loans, for which borrowers provide little or no proof of their income, and high-interest subprime mortgages, given to people with credit problems.

The revenue was immense: MGIC charged up to 2.5 times more for insuring a riskier mortgage than for a more conservative loan, Culver said.

"Frankly, it carried the company in '01, '02, '03, '04," Culver said during the interview in his downtown office overlooking Red Arrow Park.

MGIC insured $25.7 billion in riskier loans in 2001, more than a 12-fold increase from its 1999 level of about $2 billion.

The pace slowed when the housing crisis hit, with MGIC's bulk business falling to $18.9 billion in 2006 and $7.8 billion last year, according to filings with the Securities and Exchange Commission. It has since stopped insuring those types of loans.

But signs of trouble began surfacing even earlier, about three years ago.

"I remember this conversation in 2005," Culver said. "Things were going so well in California and Florida that Larry Pierzchalski, who heads our risk management group, came to me and said, 'Curt, things are too good in California and Florida. We need to raise the prices on our bulk business there.' "

So MGIC raised its rates in California and Florida, Culver said.

"We felt we could price the risk," he said.

Tried to spread risk

Knowing it was playing in a risky arena, the company took other action to protect itself: For instance, it sold portions of its risk to other companies, a common industry practice. The re-insurance company would receive some of the premium revenue in exchange for taking on the added risk.

MGIC did three such deals, but then it got caught flat-footed when it tried to dump more risk just when some in the market started expressing concerns that the housing bubble was about to burst.

"We were working on a fourth deal, which was huge," Culver said, declining to specify the size of the proposed transaction. "Right about then, the market, in late '06, people started saying, 'You know, things aren't looking as good in that space as they did a couple of years ago.' . . . We couldn't get that deal done."

Also, MGIC's plan to acquire Radian Group Inc., a competitor, fell through last year because of the growing problems in the subprime industry. The deal collapsed after the two competitors had to write off most of their $1 billion investment in a subprime joint venture called C-BASS.

MGIC took a $303 million after-tax write-down on the C-BASS investment and an $11.3 million charge for its failed takeover bid.

Four shareholder suits have been filed by unions and pension funds against MGIC, contending it did not fully disclose the problems it was facing. The company denies the allegations.

MGIC's decision to play in the riskier field "must have been a gut-wrenching decision," said William Lacy, who retired as MGIC chairman in 2000 after tapping Culver as his successor.

The mortgage mess began with loan brokers and bankers and stretched all the way to the Wall Street firms that packaged the loans and sold them to investors, Lacy said. Once MGIC hopped on that train, it couldn't get off.

"They weren't driving the train; they were in one of the cars," said Lacy, who cut his ties with MGIC when he retired. "When you're in the middle of the train, you can't say, 'Excuse me; derail me.' "

Analyst Thane Bublitz, who follows MGIC for Thrivent Asset Management, said he was disappointed that the insurer got so deeply into the riskier loans.

"They're supposed to be in the mortgage business, and here they fell into the same trap," Bublitz said. "They felt they had to do it to compete. . . . I don't think there is anything nefarious - they just let their guard down."

Getting a handle on how much more MGIC may lose in the months or years ahead is impossible, as it doesn't know what percentage of loans it insured in 2006 and '07 will go into default. Also, the company doesn't know how effective government bailout programs may be in helping homeowners avoid foreclosure.

"It all depends on these delinquencies," Culver said. "What we've seen on the delinquencies is they're just not curing like we expected them to."

The less-stringent underwriting standards led to another problem that MGIC is grappling with today: fraud. So far this year, fraud - such as applicants lying about their income - has been discovered in about 8% of the claims filed with the company, up from 1.5% last year. Culver said fraud had been found on approximately 15% of the claims filed on its riskier bulk business.

Even what is supposed to be the company's more conservative line of business got dicier in the past few years, as conventional loans became easier to get.

Assigning blame

As government and industry officials sort through the damage caused by the meltdown of the subprime market, there is plenty of blame to go around.

The mortgage insurance industry "was certainly part of the problem. I would argue they thought they were taking an appropriate risk," said Robert Beggs, a money manager with the State of Wisconsin Investment Board, the public employee pension fund that owns 844,000 shares of MGIC stock. SWIB paid an average of $24.98 for its shares.

"Hindsight is always 20-20. Perhaps they should have walked away from the business, and then perhaps we wouldn't have the problems that we're having today," Beggs said. "Were they part of the problem? Yes. Was everybody part of the problem? Yes."

Howard Shapiro, an analyst at securities firm Fox-Pitt Kelton, said the mortgage insurance industry had no choice but to jump on board and insure the riskier loans.

"Either you're effectively put out of business because you're not writing any new business, or you play along," Shapiro said. "Back then, somebody like Countrywide had the market power to say, 'You're going to play with us across the spectrum or you're not going to get any business from us.' "

But if MGIC had given up revenue and market share - the company controls about a quarter of the market - it would be in better shape today, said James Brender, an analyst at Standard & Poor's, one of two rating agencies that downgraded MGIC.

"MGIC's financials would look a lot better," Brender said. "They would be reporting losses . . . but they wouldn't have the need to raise capital."

This year the company raised nearly $1 billion by selling stock and bonds, and just last week it eliminated its dividend, which stood at 25 cents last year.

The current crisis is MGIC's second brush with disaster in its 51-year history. With the aid of a $250 million infusion from Northwestern Mutual Life, Lacy led the company from the edge of collapse in 1985.

"I've been gone eight years, thank God," Lacy said. "I'm very hopeful, very hopeful that they could . . . emerge successfully like we did."

Despite MGIC's troubles, Culver, Beggs, Lacy and several analysts predict that the company will survive - because it is in better financial shape than most of its competitors, and because it tapped the capital markets early.

"This is a once-in-a-lifetime event we're dealing with here," Culver said. "We're still standing. We're still doing business."

MGIC Investment Corp.

Founded: 1957

Headquarters: MGIC Plaza, Milwaukee

CEO: Curt Culver, named CEO in 2000

CEO's 2007 compensation: $3.45 million

Employees: 1,140 full and part time, about 70% in Milwaukee area

2007 revenue: $1.693 billion

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