MGIC Plan to Keep Selling Coverage at Risk
08/02/2012| 10:36am US/Eastern
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--Freddie Mac imposes conditions on its agreement to allow MGIC to keep selling coverage
--Wisconsin regulator objects to some conditions
--CEO says resolving differences will be a "major issue" for the company
A plan by MGIC Investment Corp. (>> MGIC Investment Corp.) to continue selling mortgage insurance is at risk during a tug-of-war between its primary regulator and Freddie Mac (>> Federal Home Loan Mortgage Corp), one of its major customers.
MGIC, plagued by billions of dollars in losses over the last five years, had hoped to keep selling coverage in several key states under a complicated plan that involved a new subsidiary. But the company warned Thursday Freddie Mac had imposed several conditions on its approval of the new subsidiary, and insurance regulators in Wisconsin objected to at least some of the conditions.
Freddie is demanding the insurer secure an agreement from Wisconsin's insurance department that stipulates the new subsidiary's capital can be used to pay claims on policies sold by the existing subsidiary. The state insurance department, though, said the requirement ran contrary to its responsibilities as a regulator.
"They were essentially looking at requiring us to give up our rights and obligations as a regulator and that obviously won't work," said J.P. Wieske, a spokesman for the insurance department.
The conditions also include a requirement that MGIC provide an additional $200 million in capital to its existing subsidiary and settle a dispute with Freddie Mac over some older policies. Standard & Poor's estimated Thursday the $200 million payment to the subsidiary would leave MGIC's holding company with about $100 million.
The disclosure, buried in MGIC's "risk factors" included at the end of its second-quarter earnings, sent shares of the mortgage insurer tumbling Thursday to close down 64% at 88 cents.
MGIC has approval from Fannie Mae (>> Federal National Mortgage Association) to sell coverage without that condition, but it warned "lenders may not know which GSE will purchase their loans until loan origination is complete," which could mean "lenders may be unwilling to procure mortgage insurance" from the new subsidiary in the states where it operates. Freddie Mac is a GSE, or government-sponsored enterprise, which purchase mortgages from private lenders and packages them into securities.
"Furthermore," the company warned, "if we are unable to write business on a nationwide basis utilizing a combination of" the two subsidiaries, "lenders may be unwilling to procure insurance from us anywhere."
MGIC executives didn't discuss that danger on a conference call with analysts and investors Thursday, but said they had scheduled a meeting with Wisconsin's insurance commissioner to discuss the Freddie Mac demands, made in a letter the company received late Wednesday, and hoped to "get the parties to agree" on how to proceed.
"That will be my direction for the next few months, I guess," said Chief Executive Officer Curt Culver. "That'll be a major issue for us as we move toward the end of the quarter."
Wisconsin's approval is necessary because MGIC is operating under a waiver from the state that allows it to sell coverage despite that it has tripped a key capital measure. The state can revoke the waiver at any time.
Mr. Wieske, the spokesman for the Wisconsin regulator, said representatives of the department "have been in weekly contact with MGIC and are working on this issue."
"We will certainly entertain more discussion," he said.
As for the demand that the company send $200 million from the holding company to its existing subsidiary, Mr. Culver said management hadn't discussed it with MGIC's board of directors yet.
"We're not in a position to say" whether the company will comply with the demand, he said. "Only the board has the approval to make that commitment. We'll be discussing it with the board."
MGIC and its rival mortgage insurers, including Radian Group Inc. (>> Radian Group Inc.) and Genworth Financial Inc. (>> Genworth Financial Inc), have suffered from years of losses after selling too much coverage at too cheap a price as the housing bubble inflated and later burst. Some regulators have shown a willingness to allow insurers to keep selling new coverage despite exceeding standard risk metrics, since the new policies have proven to be highly profitable and can be used to meet the older obligations.
But other insurers, including PMI Group Inc. (>> The PMI Group, Inc.) and Old Republic International Corp. (>> Old Republic International Corporation), have had to halt sales in their mortgage businesses. PMI filed for bankruptcy protection last year and both PMI and Old Republic are paying just a fraction of each claim under orders from regulators.
Thursday, Standard & Poor's said it was lowering the insurer-financial-strength ratings and long-term-issuer credit ratings on Mortgage Guaranty Insurance Corp. and MGIC Indemnity Co., MGIC's subsidiaries, as well as other mortgage insurers, noting its outlook for the subsidiaries is negative.
The outlook "reflects the continuing risk of significant adverse reserve development" and the "impact we expect ongoing losses to have on the companies' capital positions," S&P said.
A spokesman for Freddie Mac declined to comment.
--Andrew R. Johnson contributed to this article.
Write to Erik Holm at erik.holm@dowjones.com
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