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As GSE Delinquencies Hit All Time Highs, What About The Monolines?
Submitted by Tin Cup
Good post on the skyrocketing Fannie delinquencies. What does that mean for the guys that are 20x leveraged and took the first loss piece of the most adversely selected loans of Fannie (and Freddie) during the bubble years of 2005-2007? Why, it means that PMI, MTG, and RDN are trading at 52week highs, and their CDS is rocketing tighter, of course. Makes perfect sense.
KEY POINTS-
- Borrowers have been making private mortgage insurance payments for many years. Now that the MIs face large losses, they have ramped up claim denials to 20-25%, up from virtually nothing two years ago. Borrowers will indirectly bear the cost for the MIs not honoring claims in the form of higher borrowing rates.
- State regulatory requirements require MI’s to be below certain Risk to Capital thresholds to write new business. The MIs are rapidly accelerating toward the 25:1 state regulatory limits, where NO new business can be written. Some states have voted to temporarily waive the 25:1 RTC requirement as long as the MI is in “sound financial condition.” If the insurers reach this level they are by definition not in “sound financial condition.” States should not be looking the other way and allowing them to continue putting policy holders and ultimately taxpayers at risk. While that may buy the MIs an extra few months the companies are so levered and have such little capital that 25x turns to 100x VERY quickly
- PMI: 22.0x
- MTG: 22.1x
- RDN: 15.4x (receiving $1b in accounting credit from bond insurer capital; RTC would be approx. 25x-28x without bond insurer benefit)
- The MI business model is questionable at best and we believe that it will be increasingly viewed as such. When the insured really needs the payment from the MIs, they will not be around to pay the claim due to their undiversified business model, modest loss reserves, and the nationwide collapse in house prices. The MIs evolved into primarily a way to arbitrage around the charter 80% LTV limit of the GSEs
- MIs do NOT take reserves for expected losses or for changes in the outlook. For example, no matter how ugly the housing market outlook deteriorates, MIs do NOT take additional reserves. They only reserve for loans that fall delinquent by 2 payments or more. This creates a very backward looking reserve and materially overstates earnings and financial strength in a severe downturn like we are currently experiencing
Mortgage modifications will have muted impact as modifications have very high redefault rates of greater than 50% after six months and only about 30% of Chapter 13 reach successful completion of the plan
- The redefault rate for FNM/FRE loans post modification is extremely high
- 6 months post mod: 45.7%
- 9 months post mod: 52.7%
- 12 months post mod: 56.9%
- The redefault rate for FNM/FRE loans post modification is extremely high
- The majority (60%-65%), of the MI’s risk outstanding, was written from 2006-2008, resulting in many borrowers being underwater on their homes due to declining home values. “Higher quality” business written in 2008 already showing significant weakness. Furthermore, MIs considered 620 and above FICO score borrowers as “prime”, versus the more standard definition of 720
- Current defaulted loans (at average claim size) are approximately 160% of cash. So, just the CURRENT defaulted loan book is 1.6x existing capital. Statutory capital is significantly less than cash and investments (currently 25%-33% OF cash amount) so the defaulted loan inventory completely overwhelms statutory capital. Plus, they have another 82% of their book (the non defaulted book), that is defaulting at an increasing rate. This will further overwhelm capital
- GSE delinquency rates (90+) continue to rise unabated
- FNM CE book as of 1/10 was 13.68% dq vs 11.52% in 8/09 and 7.24% in 1/09 (increase of 89% y/y)
- FRE CE book as of 1/10 was 8.52% dq vs 6.59% in 8/09 and 4.3% in 1/09 (increase of 98% y/y)
- Rescissions and denial activity should subside as books of business season and delinquencies have shifted from bulk book to flow book. BofA/Countrywide is suing MGIC due to their belief that they are wrongfully denying claims. "I would be disingenuous if I didn't say people were throwing everything over the wall they can, because they are," Joe Price (head of BofA consumer banking) said during a January conference call with analysts
- 8 million homes (and growing) are currently DQ or in FCL process which should put significant pressure on the housing industry and lead to another downturn in pricing
- Mortgage financing standards remain strict and the govt is basically the only entity providing financing (GSE’s/FHA/VA making 9 out of 10 mortgages)
- Legacy loan issues continue to prevent the MIs from accessing the capital markets (even with large run up in most asset classes)
- FNM/FRE have established reserves against the existing MI’s and included harsh language in their filings. From FRE 10K “We believe that several of our mortgage insurance counterparties are at risk of falling out of compliance with regulatory capital requirements, which may result in regulatory actions that could restrict the mortgage insurer’s ability, in certain states, to write new business, and thus could negatively impact our access to mortgage insurance for high LTV loans. In addition, if a regulator determined that a mortgage insurer lacked sufficient capital to pay all claims when due, the regulator could take action that might impact the timing and amount of claim payments made to us. Further, we independently assess the financial condition, including the claims-paying resources, of each mortgage insurer. Based on our analysis of the financial condition of a mortgage insurer and pursuant to our eligibility requirements for mortgage insurers, we could take action against a mortgage insurer intended to protect our interests that may impact the timing and amount of claims payments received from that insurer.”
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I've been wondering as once I was a PMI payer. With all the foreclosures, toxic mortgages and huge losses, where has PMI been? Is that insurance stash gone or perhaps never there?
I was wondering the same thing. When the shit first started to hit the fan I wondered wtf had happened to PMI. I've never actually had it, so figured maybe I misunderstood what PMI was for.
"PMI plays an important role in the mortgage industry by protecting a lender against loss if a borrower defaults on a loan and by enabling borrowers with less cash to have greater access to homeownership. With this type of insurance, it is possible for you to buy a home with as little as a 3 percent to 5 percent down payment. This means that you can buy a home sooner without waiting years to accumulate a large down payment."
So I didn't misunderstand it, but apparently it's completely useless.
Tin Cup, you forgot one point - in order to stay under the 25:1 risk-to-capital ratios, the MIs are using insanely high cure rate assumptions on their current delinquencies. Despite their delinquency inventory getting older and older, they are assuming this inventory will cure at historical norms. This is especially true of PMI and RDN. If they were reserved at anywhere near rational rates, they would all have exceeded the statutory limits 2 quarters ago.
And yet, Fannie and Freddie allow them to continue to insure loans.
When these companies can't pay their claims, it won't be the borrowers who will suffer, it will be the taxpayers.
"...it will be the taxpayers".
Yeah, and that's what really pisses me off. Tin Cup, your analysis is very readable and nicely presented.
Yet one more facet of The Double Whammy. The cost of living and doing business keeps rising in the midst of a deflationary environment.
What a kick in nuts! Home values are still deflating, personal incomes of potential buyers are deflating (but productivity is up! :) ) even employment is deflating. But Monoline debacle adds another layer of increased cost due to risk. On top of increased taxes, banks charging more pesky fees as they struggle to get profitable, consumer credit sky high, insurance costs up, building materials and energy costs higher too. Yipes!
One foot in deflation and the other in inflation is like trying to do a full split for the consumer and small business. Best of all the Fed must deny lest they tip over canoe for a second dip in the chilly waters.
Also, I would add to your statement from FRE, this was also in their 10k:
"Except for Triad, we expect mortgage insurers to continue to pay our claims in the near term. We believe that some of our mortgage insurers lack sufficient ability to fully meet all of their expected lifetime claims-paying obligations to us as they emerge."
Ah yes, Triad.
A while back I indulged myself the fantasy of submitting a takover offer for TGIC - market cap at the bottom was less than 2 million.
Of course the silly thing was (is) insolvent. Still they had (I think) a hundred million or so in assets, managers deserve to be paid you know.
What a topsy turvy world we live in!
The melt up will continue -
Either they take the dollar down by half, basically doubling the money supply and inducing MASSIVE nominal inflation -
Or its lights-out, mad max cannibalism in the US.
So why not bet on the "upside" ?
This sort of begs the question: What the hell then is the deal with the muni-bond insurance business?
-A municipality is able to signifigantly lower it's cost of borrowing thanks to municipal bond insurance which raises the rating on those bonds and thus lowers the coupon.
-But what is the probability that a set of circumstances which causes a municipality to default also leaves the bond insurer solvent enough to pay off the claim? - or many, many claims at once?
-If it's an isolated, self-induced, Orange County type crisis, that's one thing. If it's a larger, more systemic type crisis like the one we just had or the one that's probably just around the corner...look out.
Maybe there's something I'm missing but I've always thought municipalities saved a huge amount of money in exchange for a small one time payment while the bond holder trades a significantly higher rate of return for dubious security.
I've come to realize that no intelligent person relies on muni bond insurance.
It exists because offering yields can be reduced by more than the cost of the insurance. In other words the issuing IB earns an arbitrage profit, washes their hands and moves on.
It's pure rating agency arbitrage, it has no real economic value.
Information vs trading advice. PMI up 20% today.
I think that was the point of the post - why are these zombies up so much?
Obviously the MIs are worth more alive than dead to somebody, maybe the mortgage State Owned Entities (GSEs).
Somebody is bidding up these zombies - makes little sense as the only true beneificiaries are management who can pay their bonuses out before the money goes away. Ah, maybe that is the circle jerk. Company funds paid to managers who acquire stock to bid up price to show good standing of the company!
Perhaps an equity offering is in the works.
Hey, it worked well for Citi, BofA, and many others...
Guaranteed the MIs are eyeing equity offerings.
The only problem is they are barely writing any new business, unlike Citi, BAC, etc who still have customers.
Any equity would basically be used to pay off losses from old business.
Not that that will stop some stupid fund manager from buying it.
No double dip to see here...
I hate the MI companies. At the end of the day we will point to the growth of these beasts as the straw that broke the camel's back. They opened the door for Fan and Fred to buy 100% mortgages. It has been a disaster. The largest pecentage of delinquencies comes from "enhanced" mortgages.
The MI industry has a D.C. lobby called MICA. I sent them a note the other day after Fan announced its February disaster. They did not write back. Surprised?
to Jeff Lubardate Tue, Mar 30, 2010 at 11:30 PM subject Question
Does MICA have a public response for the results at Fannie this month? Their enhanced defaults are up again. Three months in a row above 13%. Double a year ago. This means your base is still writing junk and selling it to the Agencies.
Bruce Krasting
No intelligent person expects MI to pay off in a systemic failure.
But possession of MI enhanced (s) the value of something else, be it a securitization, or a GSE portfolio. When it no longer is permitted to do so the MICA boys will be allowed to die.
Look at the dq rate on non-enhanced loans. Not bad, actually. 3-4%, that is manageable.
But on the credit enhanced stuff, horrible.
MI should be eliminated, we would seriously be better off if the GSEs could just self-insure for the high LTV risk. Having a private industry provide insurance for the riskiest loans is totally ass-backward. The high LTV crap is the stuff that goes down the hardest in a crash.
The MI industry almost went bust in the 80s, we should have learned the lesson then.
ghost- very good points. You could also add:
-the MIs treat a rescinded or denied claim the SAME as if they paid it off. They count the formerly defaulted loan as current, release all reserves, and hold no reserves against the possibility that the claim is kicked back to them (despite OCC and private sector data showing that the majority will default within 12 months).
-the GSE's (AAA rated) are buying "tail risk" insurance from BB, B, or CCC rated entities
-if private MI is such a valuable and attractively priced product, why is their penetration into the private sector near zero (aside from a modest amount of securitized pools where the underwriters were able to further game the ratings).
-Radian is woefully under-reserved at Radian Asset Assurance and has $60B+ in exposure to synthetic corporate CDOs, TRUPs CDOs (two defaults already), CRE CDOs (the lower slices, not the traditional ~50-100% slices), ABS CDOs that are in distress and expected to suffer material losses, etc. Yet, they continue to release contingency reserves and consolidate that capital into their MI business.
-Radian also has this dodgy tax and expense sharing agreement, that appears to be a windfall for the holding company, much to the detriment of the policyholders (if anyone outside the company could actually figure out how the it works and how Radian's holding company is able to trap all that cash that should be going to the benefit of the policyholders)
-what the heck are the large banks thinking (or not) still using the legacy private mortage insurers? The private MIs have taken premiums (paid for by the borrowers) for many years, but when it comes time to pay they jam most of the claims back to the banks. This is even though many of the rescissions are groundless, and the MIs were so deep inside the process they knew full well what they were getting. Granted, BAC has stopped doing business with the largest (MTG), concurrent with their lawsuit against MTG.
-etc
But, as ZRO tells you (or was that Joey Terranova), these stocks are telling you something!
Oh, I could add a lot more:
The GSEs have given MTG permission to take policyholders funds out of the operating company to pay off holding company debt.
The Arizona insurance commissioner let PMI's holding company pay less than face value to its operating company for a performance note, so they could pledge that performance note against the holding company line of credit.
RDN was allowed to pledge its interest in Sherman in lieu of cash to satisfy that expense sharing agreement.
And when these companies don't have the money to pay their claims, it will be the taxpayer who pays.
lets not get too far ahead, the run up is required inorder to have a more profitable run down (fall off?).
They've been fucked for a couple of years now. You could see what was going to happen as soon as you followed along with Ackman's decomposition of one of the CDOs they insured.
Excellent detail in this article. Why can't the MSM report like this?
Well, at least the WSJ tried last night. Good question too - why was PMI given permission from Freddie to continue to write new business?
http://online.wsj.com/article/SB1000142405270230473910457515427419353411...
ahh the fundmental honesty of a stock trader. sure he lies for a living, but he knows what he must do to "butter his bread." The post said it all: "government bailout." Since we live in bailout nation you "buy on the rumor sell on the fact" even though "the company is evil" the "company is insolvent" etc, etc... You don't get it yet? You're not looking at who REALLY doesn't have any money right now. Ironic that they can "print all the money in the world" and yet "have none" is it not? Now it is an ASSUMPTION made in this post that PMI will be bailed out. A VERY GOOD ASSUMPTION mind you but an assumption no less. What the government will actually do in here is a whole 'notha matter.
Tin/others-Hoping for updated thoughts. Stocks skyrocketed on a month of declining defaults and improving cures. Guess that means a big release of reserves and much better "earnings"/smaller losses. If can gets kicked some more in the short-run (e.g., more HAMP mods go permanent than new defaults), can that continue for a few quarters? Would expect that with back-end DTI still at 60%, there will come a time not too far out that the permanent mods will start failing and then the mirage of improving defaults goes away. Thoughts?
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