The chief executive officer of Radian Group Inc. (RDN) warned that lenders and insurers need to work closely with the U.S. government to prevent further "shocks" to the housing market in the wake of the takeover of a rival mortgage insurer by Arizona regulators last week.

"The housing industry is in a very fragile situation," said Radian CEO S.A. Ibrahim in an interview Sunday. "We all need to work very collaboratively to do everything we can to make sure the housing industry doesn't suffer any more shocks," he said. The warning comes as regulators and legislators are working to overhaul the mortgage market on several fronts, with the aims of reducing the government's role and avoiding a repetition of the conditions that resulted in record foreclosures when the most-recent housing bubble burst.

The Arizona Department of Insurance last week seized control of PMI Group Inc. (PMI), ordering the mortgage insurer to pay just 50% on any future claims, with the remainder to be deferred.

Mortgage insurers pay lenders on a portion of their losses if homeowners default on their loans. The regulator's order means mortgage investors such as Fannie Mae, Freddie Mac and Wells Fargo & Co. (WFC) will likely be footing more of the bill than they expected on defaulted loans insured by PMI.

"I hope PMI's announcement doesn't cause further psychological harm to the homeowners market," Ibrahim said. But Ibrahim said the remaining mortgage insurers are healthier than PMI, and should be allowed to continue selling new coverage. Mortgage insurers tightened their underwriting standards after the housing bubble burst and insist the coverage they are selling now will be highly profitable.

"There's a huge advantage to all of us to being allowed to continue to write new business," Ibrahim said. "As long as the remaining players continue to write business, the industry model will be scarred but whole. Should any more players be forced to stop writing business, it starts to cost the taxpayers even more money" because a shuttered company wouldn't be able to use profits on more-recent policies to pay off claims on the older ones.

Even PMI could have benefited from being allowed to sell coverage, he said. The regulators in Arizona forced the company to stop insuring new mortgages in August in advance of last week's takeover. Because new business is profitable, Ibrahim said, "to some extent, it may have been better if [Fannie and Freddie] and others could have worked to allow PMI more flexibility. It may have been better for the policyholders than getting paid 50%."

Ibrahim said that, unlike PMI, Radian's available capital is well above the triggers that would require waivers from Fannie, Freddie and state insurance regulators to keep selling new business. In addition, the company has said it will have $630 million available at its holding company at the end of the year that it could distribute to its mortgage-insurance subsidiary if needed to further boost capital levels.

   -By Erik Holm, Dow Jones Newswires; erik.holm@dowjones.com
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