Two of Top Three Mortgage Insurance Providers Consolidate
MGIC Investment Corp., the largest U.S. provider of mortgage insurance, has announced it will buy the third-biggest, Radian Group Inc., for $4.9 billion in stock.
The firm homes that by making the purchase, it will reduce computer and salary expenses and improve its margins in this suddenly stagnant mortgage market.
Milwaukee-based MGIC will exchange 0.9658 share of its stock for each share of Radian, paying no premium to Radian’s $61.28 closing share price on February 2, the Boston Globe reports.
The new company, which will be in control of about a third of the country’s mortgage insurance market, plans to cut almost a quarter of its combined costs to boost profit as demand for protection against home loan defaults wanes.
MGIC also will get a foothold in bond insurance - a market that PMI, the number two mortgage insurer in the U.S., first entered back in 2003.
In the United States, mortgage insurers have been hurt in large part by the advent of the second mortgage, in which a borrower actually takes out two mortgages - also known as piggyback loans.
A second mortgage effectively eliminates the need for insurance on mortgages with a low down payment. MGIC and Radian are expecting to cut about $128 million in expenses by 2009 and are targeting opportunities to grow overseas, where some markets are nascent.
“The shape of the market has changed dramatically and it’s unclear as to how it’s going to continue to change,” Radian CEO Sanford Ibrahim said.
The new company, to be called MGIC Radian Financial Group Inc., will have about $290 billion of home mortgage loan insurance in force, the companies said.
Through the first nine months of 2006, MGIC insured $42.5 billion of home mortgages, accounting for 22 percent of a total $195 billion insured. PMI had 19 percent, followed by Radian’s 17 percent.
In the same period in 2005, $197 billion in mortgages were insured.
“Market share is going to be naturally repositioned” because mortgage lenders won’t want to do too much business with one insurer, said Geoffrey Dunn, an analyst at Keefe, Bruyette & Woods Inc. in Hartford, Conn.