NEW YORK (AP) - Standard & Poor's Ratings Services late Tuesday slashed its
credit ratings on four mortgage insurers because of concerns that rising
unemployment and falling home prices could lead to more defaults and drag down
the companies' earnings.
The rating firm said the credit outlook remains negative even after the
downgrades of MGIC Investment Corp., Old Republic International Corp., PMI Group
Inc. and Radian Group Inc., suggesting further cuts are possible.
"The downgrades reflect weaker-than-expected results for the fourth quarter
of 2007 and the continued deterioration in key variables that influence claims
for mortgage insurance," S&P credit analyst James Brender said in a statement.
S&P said it is now expecting U.S. unemployment to reach 5.8 percent in 2009
and is predicting "considerable uncertainty in the job markets."
"The deterioration in the housing markets has also been worse than our
expectations," S&P said, with house prices now expected to tumble 20 percent
from their 2006 peak. As recently as November, S&P was predicting a decline of
11 percent.
As a result, most mortgage insurers will not generate an underwriting profit
before 2010, S&P said.
The rating firm cut MGIC's and Radian's counterparty credit rating to 'BBB'
from 'A-', and the counterparty credit and financial strength ratings on the
companies' mortgage insurance subsidiaries to 'A' from 'AA-'.
PMI's counterparty rating was cut to 'BBB+' from 'A', while the counterparty
credit and financial strength ratings on its subsidiaries were lowered to 'A+'
from 'AA'.
Old Republic's counterparty rating was cut to 'A' from 'A+', and the
counterparty credit and financial strength ratings of its main subsidiaries were
cut to 'AA-' from 'AA'.
All the ratings remain investment grade.
However, the move puts at risk most of the companies' ability to insure
mortgages sold to government-sponsored mortgage financiers Fannie Mae and
Freddie Mac, because their mortgage insurance divisions now have ratings below
'AA-', S&P said.
Replacing the service provided by the insurers "would be extremely
difficult" in the near term because firms rated below 'AA-' account for about 58
percent of the entire market for mortgage insurance, S&P said.
"The other mortgage insurers do not have the capital to absorb all of this
volume," the firm added.
Last week, Freddie Mac demanded that mortgage insurer Triad Guaranty outline
plans to restore its 'AA-' rating following downgrades by Fitch Ratings and
Moody's Investors Service. On Tuesday, Freddie Mac issued statements saying it
will require remediation plans from Radian, PMI and MGIC.
Separately, PMI Group responded to S&P's action, saying the company has
"significant financial resources" to pay insurance claims on defaulted loans.
"We are a strong risk counterparty for our customers, said Steve Smith, PMI
Group chairman and chief executive. "PMI's capital position and the resources we
have available to pay claims have not been affected by S&P's ratings decisions."
Radian said it is in the process of submitting a remediation plan to Fannie
Mae and Freddie Mac, which defines the company's objectives and strategies it
will follow to serve the mortgage market now and in the future.
Radian also said it is in talks with its lenders about changing certain
requirement of its credit facility, including the covenant related to its
ratings.
Finally, the company said it is evaluating alternatives to strengthen its
capital position, including selling stock or negotiation cash infusions from
third parties, and possibly selling off its financial guaranty subsidiary,
Radian Asset Assurance Inc. But Radian asserted that it retains "adequate claims
paying resources to cover its losses and pay all policyholders."
MGIC said it doesn't expect the ratings change to impact its business with
Freddie Mac, Fannie Mae or its mortgage insurance customers.
"While we are disappointed with the action of S&P, MGIC's most important
responsibility -- to meet its claim obligations to its customers, a
responsibility best measured in our view by our capital adequacy ratio --
continues to be above S&P's minimum ratio for a 'AAA' rating," said Curt S.
Culver, chairman and chief executive of MGIC.
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