Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble

More important downgrades done ever so quietly…

S&P downgraded four mortgage insurers, MGIC Investment, Old Republic, PMI Group, and Radian Group and nobody really noticed. All those hedges the hedgies, major investment houses and banks put on through these firms are increasingly likely to be WORTHLESS. Expect more massive write downs this quarter as that reality starts to sink in.

I’ve put up the Credit Default Swap (CDS) spread charts up. To keep it simple, high spreads are bad. The higher the spread, the greater the cost of buying insurance against default. Big, sudden spikes represent the rapid deterioration of perceived credit quality. Any spreads near 1000 start to get problematic. When spreads are high enough, sellers of insurance will demand the spread plus an up front lump sum. This lump sum is not represented on these charts. Consequently, these charts UNDERSTATE current credit risk.

Notice how things have improved somewhat? Well, don’t get too giddy with Bullish optimism. The spreads have not come back nearly enough for that.

Notice how the credit stress isn’t just concentrated among the Guarantee companies, but spread nicely among everybody from the Banks, Brokers, Builders, and REITS? That’s why it’s called a GLOBAL credit bubble and a GLOBAL credit crunch.

For other important downgrades that were SNUCK in when nobody was really looking, see my recent post Quiet Sneaky Little Downgrades: CFC, MBI

S&P Release on Four U.S. Mortgage Insurers:
“Standard & Poor's Ratings Services said today that it lowered its counterparty credit rating on MGIC Investment Corp. (MTG.N: Quote, Profile, Research) (MGIC Investment) to 'BBB' from 'A-' and its counterparty credit and financial strength ratings on the mortgage insurance subsidiaries (MGIC) to 'A' from 'AA-'. The ratings were removed from CreditWatch, where they were placed on Jan. 24, 2008, with negative implications. The outlook is negative.

Standard & Poor's also said that it lowered its counterparty credit rating on Old Republic International Corp. (ORI.N: Quote, Profile, Research) (ORI) to 'A' from 'A+' and its counterparty credit and financial strength ratings on ORI's core subsidiaries to 'AA-' from 'AA'. The ratings were removed from CreditWatch, where they were placed on Feb. 25, 2008, with negative implications. The outlook is negative.

At the same time, Standard & Poor's lowered its counterparty credit rating on PMI Group Inc. (PMI.N: Quote, Profile, Research) (PMI Group) to 'BBB+' from 'A' and its ounterparty credit and financial strength ratings on PMI Group's mortgage insurance subsidiaries in the U.S. (PMI) and Europe (PMI Europe) to 'A+' from 'AA'. The ratings were removed from CreditWatch, where they were placed on Feb. 13, 2008, with negative implications. The outlook is negative.

In addition, Standard & Poor's lowered its counterparty credit rating on Radian Group Inc. (RDN.N: Quote, Profile, Research) (Radian Group) to 'BBB' from 'A-' and its ounterparty credit and financial strength ratings on Radian Group's mortgage insurance subsidiaries (Radian MI) to 'A' from 'AA-'. These ratings remain on CreditWatch, where they were placed on Feb. 13, 2008, with negative implications.

“”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,” explained Standard & Poor's credit analyst James Brender.When we resolved the CreditWatch status of several mortgage insurer ratings on Nov. 21, 2007, we stated that if unemployment rose above 6%, incurred losses for all mortgage insurers would be significantly higher than our expectations. Our most recent macroeconomic forecast shows unemployment reaching 5.8% in 2009, and there is considerable uncertainty in the job markets. The deterioration in the housing markets has also been worse than our expectations. Now, we believe median home prices will decline 20% from the peak in 2006. By contrast, the forecasts we used in November 2007 assumed a decline of 11%. As a result of the deterioration in the housing and job markets, Standard & Poor's believes mortgage insurers' operating results for 2008 and 2009 will compare unfavorably with our previous expectations. Our current forecasts predict that most companies will not generate an underwriting profit until 2010, but individual results will vary.”

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