To hear William H. Lacy tell it, Mortgage Guaranty Insurance Corp.'s bankruptcy 13 years ago may have been one of the best things to happen to the company.
He says the lessons learned from the debacle have helped MGIC become the leader in a small but vital corner of the mortgage industry: insuring lenders against default.
Only eight companies provide such services, and for years MGIC and archrival GE Capital Mortgage Insurance have seesawed for the top spot. At yearend 1995, MGIC was back in command, insuring 27.6% of the $110 billion in policies written that year, according to Inside Mortgage Finance, an industry newsletter. By June 30, the company's book of business totaled $125 billion.
And MGIC's financial figures just keep getting better. Earnings per share were $3.50 in 1995, up from $2.70 in 1994 and $2.16 in 1993. In the second quarter this year, the insurer earned $62.7 million. That was up 25% from second quarter 1995.
Mr. Lacy, a 25-year veteran of the company and its chief executive since it emerged from bankruptcy in 1985, said it no longer resorts to price wars and lax underwriting standards to drum up business. "We've changed our behavior."
Industry watchers say tighter underwriting was critical to lifting MGIC and other mortgage insurers out of the deep losses - running into billions of dollars - that they suffered in the mid-1980s.
"The whole industry has underwritten a higher quality of business, and has learned to price relative to risk rather than be so competitive," said Ralph Aurora, vice president at Duff & Phelps Credit Rating Co., New York. He predicted MGIC will continue to enjoy strong financial performance because of its conservative underwriting standards.
It is difficult to imagine Mr. Lacy's facing hard times as he sits in his spacious and orderly office with cream-colored carpet, walls, chairs, and telephones. These days, rather than struggling to turn around a troubled company, he has ample time to ponder where the business is heading.
At the helm of a company that insures 1.2 million mortgages, Mr. Lacy has an unusual vantage point on the mortgage industry. He comes across as a thoughtful man who enjoys grappling with the forces driving his business.
One of the most powerful trends he sees is a wave of immigration that is pushing up demand for shelter.
"There is no question immigration will drive the market between 1998 and 2000," Mr. Lacy said. He expects the immigration flood to add 10 million new homebuyers to the market.
That will be more like the distorted 1993 market, when refinancings created $1 trillion of loan originations, Mr. Lacy said.
"Capacity was built up in 1993, and some of that still exists," he said. Which is just fine with him.
"My channel of distribution is lenders," Mr. Lacy said. "With excess capacity, those channels are huge."
But if originations slow, Mr. Lacy's business slows too, no matter how many lenders there are.
New insurance written last year dropped 13.3% to $30 billion as the volume of loan originations dipped for the second year in a row. But the persistency rate - the percentage of policies retained each year - climbed to 86.3%, from 81.5% in 1994. The bottom line was that revenues jumped by more than 20% and net income surged by about one-third.
On the surface, mortgage insurance would seem to be a simple business. When borrowers make down payments of less than 20%, they are required to buy mortgage insurance. If they default, the insurer pays the lender all or a portion of the money lost.
Since there is little to distinguish one insurance policy from another, the insurers seek to cultivate lenders by offering them extensive, and mostly free, services. MGIC has taken this approach to capture its high market share. For its clients, MGIC will evaluate servicing portfolios, underwrite a company's loans on an outsourcing basis, and trade mortgages on the secondary market.
Mr. Lacy says the mortgage insurance business has a built-in hedge against fluctuations in interest rates. He explains that the insurers' persistency ratio tends to climb as rising interest rates choke off refinancings. This improved retention strengthens revenues, compensating for any declines in new business.
The year was somewhat atypical because Fannie Mae and Freddie Mac required deeper coverage on loans they purchased, and this helped cushion the decline in new business. But the natural hedge was clearly at work.
Losses, however, are a tougher problem, and only skillful underwriting can keep them under control. MGIC has rolled out new products this year to help lenders make less-risky loans.
MGIC developed a model to predict the possibility that a delinquent loan will be worked out or foreclosed. The Loss Mitigation Score will be introduced this fall. Another model, MGIC Loan Performance Score, predicts the likelihood that a loan will go into foreclosure. It combines the borrower's credit score with real estate market conditions. Another product helps evaluate the credit of self-employed borrowers.
These new risk evaluation methods should help MGIC avoid the troubles it had in the mid-1980s. That Mr. Lacy has gotten a second chance to run the company has earned him the respect of his cohorts.
"There's been a lot of corporate change (at MGIC) in the last 10 to 15 years, and Bill has run a good steady ship," said Mark Korell, group president at Norwest Mortgage Corp., Des Moines. Mr. Korell worked with Mr. Lacy when he ran MGIC's conduit from 1979 through 1983.
"I'm amazed he's been able to stay on there," Mr. Korell said of Mr. Lacy. "Customers could get ornery, but he stayed focused regardless of ownership, reinsurance, and the headlines - not all of which were positive."