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February 2, 2010 Tuesday 09:45 AM EST
SECTION: NEWS & ANALYSIS; Financial Services
LENGTH: 447 words
HEADLINE: Bank Homeowner Bailouts Lift Insurers
BYLINE: Dan Freed, TheStreet.com Senior Writer
NEW YORK (TheStreet) — Banks have stepped up their bailouts of homeowners, which is a good sign for mortgage insurers like Genworth Financial (GNW:NYSE), MGIC Investment (MTG:NYSE), Radian Group (RDN:NYSE) and PMI Group (PMI:NYSE). Genworth said during its fourth-quarter conference call last week that 2000 mortgages it insured went into the Obama administration’s Home Affordable Modification Program (HAMP), allowing the insurer to save $35 million. Genworth added that more than 20,200 more mortgages it insures are currently in the program’s trial period.If those mortgages end up modified, it would free up significant additional capital that Genworth would no longer have to hold in reserve against those loans, according to Ted Wolff, sector manager at Solaris Asset Management, which owns Genworth shares.Wolff is also encouraged by the fact that large banks, including Citigroup (C:NYSE), Wells Fargo (WFC:NYSE), and JPMorgan Chase (JPM:NYSE) have been increasing their participation in HAMP .The banks’ increasing participation represents “another piece of the puzzle that [the] program may be starting to take off,” Wolff says. “If that’s the case, it’s a real positive for the mortgage insurance industry.”Wolff also notes that mortgages entering the HAMP program is also positive for mortgage insurers because it gives them a better chance of identifying fraudulent loan underwriting, which would free them from their obligation to recoup lenders losses.Michael Grasher, analyst at PiperJaffray, is not sure the mortgage modification uptick will have a lasting impact, however.“Everybody’s cheering it, and it’s great and all that but what we don’t know is how many of these end up re-defaulting and that’s the ultimate question in terms of what the mortgage insurers have to put up in terms of reserves and maybe even payouts,” Grasher says.In a report on MGIC, Grasher writes that “re-default rates of at least 50% remain the norm.”The other major wild card for the mortgage insurers is to what extent Fannie Mae (FNM:NYSE)and Freddie Mac (FRE:NYSE) will be allowed to let risk-to-capital ratios continue to rise. To the extent that they are allowed to let them rise, it enables the mortgage insurers to write insurance on new business, on which they can turn a nice profit, Grasher says.Still, Grasher remains bearish on the economy as a whole, which is why he isn’t recommending either MGIC or Radian, the two mortgage insurers he follows. He fears Radian may have inadequate capital, and rates it “underweight.” He is neutral on MGIC, which he expects to return to moderate profitability in 2011 as the housing market stabilizes.— Written by Dan Freed in New York.
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