As the housing market crumbles, homeowners are worried about mortgage payments and sellers are worried about slumping prices — but the companies that insure their loans are worrying about their very survival in the face of billions of dollars in claims.
Insurers like industry leader MGIC Investment Corp. are predicting they won't turn a profit for at least a year. The uncertainty has sent their stocks plunging and raised questions about what happens if so many loans go bad that the insurers behind them go out of business.
In the short term, regulators and analysts say they aren't concerned about the biggest insurers staying in business.
"We're not worried about it today. You can ask us tomorrow. It may change. But right now, it's not a high priority," said Gail Madziar, spokeswoman for the Michigan Bankers Association.
And at least one competitor is making a big bet on the industry's survival. Shares of MGIC and PMI Group Inc. surged Friday after mortgage insurer Old Republic International Corp. disclosed in a Securities and Exchange Commission filings that it had accumulated a 15 percent stake in PMI Group and an 11 percent stake in MGIC.
Bankers know that insurers have cash reserves, often a threshold set by the individual states, and find mortgage insurance to be the least of their worries now, said Madzair. Instead, they just want to make sure they're giving loans to people who can afford them, she added.
Most mortgage lenders typically require home buyers to pay for mortgage insurance when they put down less than 20 percent of their home's value. Payouts to the lenders are triggered when borrowers miss payments on home loans. And with falling home prices, it's becoming less likely that delinquent buyers can sell their homes and pay off their loans.
If the insurers do run into trouble, the risks for the industry are huge. About 10 percent of the total loan market has private mortgage insurance, according to the Mortgage Insurance Companies of America. There was $776 billion in private mortgage insurance in force as of September, the trade group reported.
MGIC, which has $196.6 billion in policies written, is confident it can pay even though it figures it won't return to profitability until at least 2009. So far this year, MGIC has paid out $586 million in claims and expects to pay out $875 million for the full year.
Next year, claim payouts are expected to rise to between $1.2 billion and $1.5 billion, roughly doubling the $611 million paid in losses in 2006.
"These are big numbers," said Michael Zimmerman, vice president of investor relations. "Obviously we'll pay out large numbers but we're receiving money at the same time. We don't anticipate losing a billion dollars."
The company, like others, can decline to cover certain types of loans, including those to buyers with lower credit scores, or some that represent 95 percent or more of a home's value, Zimmerman said.
PMI Group saw its quarterly U.S. claims rise 49 percent to $92.6 million. And the insurer Radian Group Inc. posted a loss of $703.9 million in the third quarter after getting hit by writedowns and losses at a subprime mortgage joint venture with MGIC.
The industry's woes pressured MGIC to back out of a deal to buy Philadelpia-based Radian in September. The companies saw mounting losses in their joint venture and figured it was in each other's best interest to concentrate on staying afloat.
Radian chief executive officer S.A. Ibrahim likened the turmoil to "an industrywide scramble to survive."
The whole industry will most likely continue to lose money next year, break even by 2009 and possibly return to profit the following year, said Geoffrey M. Dunn, an analyst with Keefe, Bruyette & Woods. Even with those losses, the insurers should have enough in reserves to survive. He estimated MGIC has access to about $2 billion in capital to pay out claims.
"I think these companies are very well capitalized. At this point, I don't see any of these companies going under," he said.
As losses mount at the insurers, though, investors have suffered. MGIC shares are down 66 percent this year, PMI shares are off 69 percent and Radian shares are down 77 percent.
But Wall Street was buoyed Friday by the Old Republic news. PMI Group's stock jumped $3.77, or 34 percent, to $14.88 and shares of MGIC rose $2.94, or 16 percent, to $21.30. Sares of Radian Group increased $2.42, or 24 percent, to $12.62.
Shares of Old Republic initially slipped to their lowest level in more than four years before recovering. The stock rose 90 cents, or 6 percent, to $15.07.
"The sentiment has been so poor on mortgage insurance and the data keeps coming out worse than the last time it came out," said Thane Bublitz, an equity analyst for Thrivent Investment Management Inc. "That's a hard environment for these stocks to gain any positive momentum."
But he thinks the companies will survive, too, because of the extra cash they've stored in their reserves. And they'll have to make shifts in their business, Bublitz said, such as charging more for certain types of loans, as MGIC plans to do.
Several analysts noted an upside to the crisis, though — more business as consumers and lenders seek to get more loans insured. The total number of policies written through September this year was up 41 percent to 1,498,132, from the same period last year, the industry's trade group reported.