Private Mortgage Insurer Changes Business Policy
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MGIC Investment Corporation, one of the nation's largest issuers of private mortgage insurance, announced on Friday that it plans to stop accepting new business under one type of contract that it now considers to present an unacceptable risk.
Starting the first of the year MGIC will no longer take new business from "captive insurance companies." These are entities that are established to finance risk. This is the latest of a series of actions the company has taken to protect itself in the midst of a meltdown that has seen its portfolio hit by mortgage foreclosures and a downgrade of its senior debt rating by Moody's from A2 to A1 in March of this year.
In a press release MGIC said that coverage for loans that have been reinsured through December 31 will be allowed to run out but that the company's quota-share reinsurance will be unaffected.
In an attempt to shore up its financial situation MGIC has in recent months raised $840 million through sale of its securities, changed its underwriting guidelines, raised insurance premiums, sold its stake in Sherman Financial and entered into a reinsurance agreement that covers business written by the company starting last April.
Private mortgage insurance is required by banks when they write a mortgage where the borrower makes less than a 20 percent down payment or has particularly questionable credit. The borrower pays the insurance premium but the insurance covers a portion of the bank's loss in the event the mortgage defaults. Obviously that section of the mortgage market requiring private mortgage insurance has been particularly hard-hit by foreclosures and short sales since those homeowners, by definition, had little or no equity in the home at origination and then watched their home's value erode from there.
MGIC has reported negative income in each of the last three quarters. In the second quarter of 2008 which ended on June 30, it reported net income of -$97,899,000.
MGIC stock was trading at $7.20 after Friday's announcement, down $0.75 from its close on Thursday. The stock has traded as high as $31.81 and as low as $3.51 in the last year.