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Nye Lavalle
EXTRA CREDIT: TGIC Teetering On Key Ratings Threshold

October 26, 2007 3:54 p.m.
By Danielle Reed

NEW YORK (Dow Jones)--Mortgage insurers have been under fire from housing market troubles lately - and Triad Guaranty Insurance Corp. (TGIC) is the latest to feel the heat.

Standard and Poor's and Fitch Ratings put mortgage insurer Triad Guaranty on ratings watch negative Thursday, creating a potential problem for the company's core business.

The sticky point is that current guidelines at housing finance agencies Fannie Mae (FNM) and Freddie Mac (FRE) make it complicated for the agencies to buy loans insured by a mortgage insurance firm whose ratings go below a level of AA- or the equivalent.

Fitch Ratings already has Triad's rating at AA-, and on Thursday it warned that rising delinquences and its losses on loans, among other factors, has prompted the rating agency to put the company under review for a downgrade.

Standard and Poor's Thursday also warned of a ratings downgrade, but it puts Triad one notch above Fitch at AA.

S&P mentioned its concern about the nature of the loans Triad has insured. This includes a high percentage of loans where borrowers were allowed to state (and not document) income or assets, and a relatively high share - compared with other mortgage insurance companies - of option ARM loans, or loans where the principal balance can actually increase over time, S&P said.

However, stock investors didn't seem unnerved by the ratings actions.

After falling 26.6% to $6.04 Thursday, Triad Guaranty's stock turned around and rose 35% to $8.15 by late afternoon Friday.

The ratings watch is just the latest in a slew of actions that have been taken by ratings agencies concerning mortgage insurers in recent months. However, TGIC's ratings are now closer than many of its peers to a level that could put it below minimum requirements set by housing finance agency guidelines should any downgrade take place.

For loans in which borrowers don't have a 20% down payment, Fannie Mae and Freddie Mac require mortgage insurance before they'll guarantee the loans. Generally, mortgage insurers such as Triad are on the hook for losses up to around 15% of the initial property value in the event a loan default. The remaining 85% of the property value is what is most typically guaranteed by Fannie Mae and Freddie Mac.

Because mortgage insurers are taking on the riskiest exposure - a risk that Fannie Mae and Freddie Mac would rather not assume - the agencies have guidelines dictating what mortgage insurers can be approved.

According to Freddie Mac and Fannie Mae guidelines, insurers should be rated no less than AA- or the equivalent by any of the rating agencies.

Specifically, Freddie Mac guidelines state that an approved insurer should be rated by at least two of the three major rating agencies - S&P, Moody's or Fitch - and have no rating less than AA-.

Fannie Mae guidelines state that any downgrade of a rating by one of the bond rating agencies may trigger an internal review of the mortgage insurer's approval status, even if the insurer meets the minimum rating requirement with two of three rating agencies.

However, the agencies also have flexibility in applying those requirements.

Freddie Mac declined to comment specifically on the ratings actions taken by S&P and Fitch regarding Triad Guaranty on Thursday. Fannie Mae didn't return a request for comment.

Agencies Can Bend Guidelines

In response to a question about whether the S&P and Fitch ratings actions posed any potential risk to TGIC's core business, Triad's senior vice president and chief financial officer, Ken Jones, forwarded part of a transcript from Freddie Mac's Aug. 30, 2007 earnings conference call that addressed general questions about ratings difficulties potentially facing the mortgage insurers.

On the call, one analyst asked, "What is the contingency plan if a bulk of these guys, like a Radian or a Triad, gets downgraded to single A. Can they still write business for you?"

In response, Freddie Mac Executive Vice President Patti Cook responded: "We continue to believe that the MIs (mortgage insurers) are well capitalized. So despite a potential rating decline for that industry...we think they are adequately capitalized for the book of business that we have on with them at this time and that we would expect to do in the future."

Even in the event of a downgrade to a single-A status for one of these companies, Cook said on the call, it wouldn't interrupt the flow of business such mortgage insurers do with Freddie Mac.

Freddie Mac senior vice president Don Bisenius, addressing the same question on the conference call, added that the important issue for Freddie Mac isn't just the rating of a mortgage insurer, but whether or not the company has enough capital and future income to cover losses. "Even if there (are) some downgrades," he said, "their existing capacity to cover the losses they have to us is more than adequate."

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