The weak economy had led many industry insiders to the conclusion that mortgage insurers might be in for a rough spell.
MGIC Investment Corp.'s earnings warning late Friday showed just how rough it might get.
The Milwaukee mortgage insurer said it expected to report diluted earnings of $1.40 to $1.45 per share for the third quarter and $1.30 to $1.40 for the fourth quarter. According to Thomson Financial FirstCall, the company had been expected to post earnings of $1.58 per share for the third quarter and $1.61 for the fourth.
In a press statement, MGIC attributed the lowered expectations to a continued increase in policy cancellations and higher expenses caused by heavy refinance activity and higher loan delinquencies. The percentage of its insured loans that were delinquent at the end of last month rose 28 basis points from a month earlier, to 3.88%, while the delinquency rate on its prime loans rose 22 basis points, to 2.77%.
The comments reinforced a recent announcement by the Mortgage Bankers Association that the industry saw an uptick in both loan delinquency and foreclosure rates during the second quarter.
The seasonally adjusted delinquency rate for all fixed-rate mortgages rose 11 basis points, to 4.03%, while delinquent adjustable-rate loans rose 34 basis points, to 6.06%. The delinquency rate for conventional loans climbed 6 basis points, to 3.1%. Meanwhile, the industrywide the percentage of loans in the process of foreclosure rose 13 basis points, to a record high of 1.23%.
The MBA attributed these increases to continued weakness in the economy, especially in employment.
Mortgage insurance stocks took a beating as a result of the announcement. MGIC's shares were trading Monday afternoon at $49.03, down falling 11.2% from the closing price on Friday. Radian Guaranty Inc. of Philadelphia dropped 12.8%, to $34.85, and Triad Guaranty Insurance Corp. of Winston-Salem, N.C., fell 8.4%, to $37.09.
PMI Group of Walnut Creek, Calif., announced Monday that the 2002 earnings per share forecast it announced during the second quarter, $3.83 to $3.95 would remain unchanged. However, that announcement did not spare PMI from the industrywide decline; its stock price fell 8.9%, to $28.90 Monday afternoon.
MGIC's announcement prompted Gary Gordon, a managing director of UBS Warburg, to lower his 12-month stock price targets not only for MGIC but also for Radian and Triad. He lowered his targets for all three companies by $5, to $70 for MGIC, $55 for Radian, and $50 for Triad.
However, Mr. Gordon kept PMI's target unchanged, at $45, and argued in a research note that the four companies have "different business drivers that will make their earnings paths diverge over time."
For example, PMI has diversified by entering overseas markets such as Australia, New Zealand, and Europe, while Radian has diversified by buying a stake in the New York-based Enhance Financial Services Group, which has holdings in various loan workout firms, he wrote.
Triad "is the only [mortgage insurer] gaining material share in U.S. prime quality mortgage insurance, because its unique position as the smallest MI has allowed it to gain share through aggressive risk-sharing deals with lenders," Mr. Gordon wrote.
However, MGIC's strategy for diversification, which includes a heavy investment in nonprime mortgage insurance, "appears to be under stress at the moment," he wrote. For example, its 2.77% prime delinquency rate, higher than those of its competitors, indicates that the company has included some slightly subprime loans in this category of coverage, he wrote.
"MGIC's strategy is clearly the most problematic" of the four insurance companies, according to Mr. Gordon.
MGIC officials did not return phone calls and e-mails requesting comment.
Patrick Flood, the chief executive officer of the Atlanta-based HomeBanc Mortgage Corp., said that in the last quarter mortgage delinquencies have risen "to the highest level in 50 years."
Because of rising claims, Mr. Flood said that he would not be surprised if mortgage insurers' earnings are volatile. However, he also said that the industry has not yet had major concerns with rising delinquencies and foreclosures.
"From our vantage point, in new originations, the credit markets have yet to change from what I would consider to be the most liberal credit structures in the industry for 17 years," he said.
Credit standards are still very liberal, but if the economy continues to have problems, "there could very well be a tightening of credit standards down the road," he said.
