Private Mortgage Insurer: Bad Credit Home Loan Losses Lead to Reduced Earnings
Losses are up and profits down at the nation’s largest private mortgage insurer, Mortgage Guaranty Insurance Corp.
MGIC - which insures 1.3 million mortgages valued at $176.5 billion - said today that fourth-quarter earnings were down largely because the slowdown in the housing market cut into the generation of new premiums.
But the company is also facing a rise in the percentage of delinquent A-minus and bad credit home loans it insures, disclosing that regulators in New York and Minnesota have investigated its captive reinsurance practices.
Parent company MGIC Investment Corp. reported fourth-quarter earnings dropped 5 percent to $121.5 million, or $1.47 per share, compared to the same quarter last year. At $564.7 million, earnings for the year are down 9.9 percent from 2005.
Premiums written during the quarter totaled $305.6 million, down 3.5 percent from the same time last year, the company said. The $1.22 billion in mortgage insurance premiums written for the year was 2.8 percent less than 2005’s.
At the same time, fourth-quarter losses were up 9 percent from last year, to $187.3 million. Losses for the year were $613.6 million, an 11 percent increase from 2005. While the percentage of all loans insured by MGIC that were delinquent declined from last year, the percentage of delinquent bulk, A-minus and bad credit mortgages is on the upswing.
The percentage of all loans insured by MGIC delinquent at the end of 2006 stood at 6.13 percent, compared with 6.58 percent at the same time last year, and 6.05 percent at the end of 2004.
The percentage of bulk loans delinquent at the end of the year was 14.87 percent, up from 14.72 percent in 2005 and 14.06 percent at the end of 2004. Bulk loans are part of a negotiated transaction between the home loan lender and the mortgage insurer.
About 85.6 percent of the loans MGIC insures are prime, with 10 percent classified as A-minus and 4.2 percent as subprime/bad credit. That compares with 84.3 percent prime, 10.9 percent A-minus and 4.8 percent subprime in 2005.The company said 8 percent of loans insured on an individual, or flow, basis are adjustable-rate mortgages, while 65 percent insured bulk loans are ARMs.
MGIC “believes the volume of interest-only loans (which may also be ARMs) and loans with negative-amortization features, such as pay-option ARMs, increased in 2005 and 2006.”
Although the company has no data on the historical performance of such loans, it “believes claim rates on certain of these loans will be substantially higher than on loans without scheduled payment increases that are made to borrowers of comparable credit quality.”