To hedge its recession risk, PMI Mortgage Insurance Co. has invested $27 million in two bad-loan specialists.
The San Francisco company invested $17 million in Fairbanks Capital Corp. of Salt Lake City, which services nonperforming mortgages, many of them subprime; and $10 million in a related investment fund that buys troubled loans and then hires Fairbanks to service them.
PMI was the third-largest private mortgage insurer last year, both in new policies written and insurance in force, according to the newsletter Inside Mortgage Finance. Since its main line of business is covering the default risk on mortgages with low down payments, PMI is eager to mitigate losses that arise when homeowners default and it has to pay claims.
Officials said the Fairbanks deal will help it do that. For example, mortgage insurance claims would rise during a downturn but Fairbanks' business would increase, PMI executive vice president Claude J. Seaman pointed out in a press statement.
Also, a spokesman said, the two parties are talking about Fairbanks taking over the servicing of PMI-insured loans that fall 60 days past due.
Fairbanks was founded in 1989 as a vehicle for buying bad thrift loans from Resolution Trust Co. and the Federal Deposit Insurance Corp. Today it services $5.5 billion of loans.
Fairbanks started the investment fund so it could add to its servicing portfolio more quickly. Only a "limited universe" of investors understand the idiosyncratic business of servicing nonperformers, the PMI spokesman said, but somewhat more are comfortable with buying whole loans.
GE Capital Equity Investments Inc., an affiliate of a PMI rival, is also a Fairbanks shareholder. But PMI is not worried about that, a company spokesman said, because GE Capital Mortgage Insurance does not get the same loss-mitigation benefits from Fairbanks that PMI will.
In addition, General Electric Co.'s mortgage-insurance and venture-capital subsidiaries "don't talk to each other," the spokesman said. "We looked into that."
Attempts to reach a GE Capital Mortgage Insurance spokesman for comment were unsuccessful.
The PMI spokesman also stressed that Fairbanks does not compete with mainstream mortgage lenders, PMI's main clients. Fairbanks buys most of its loans from such lenders, which do not want to deal with seriously delinquent loans, he said.
PMI is not the first insurer to align itself with a bad-loan specialist. Four years ago Mortgage Guaranty Insurance Co. of Milwaukee invested $24 million in C-Bass Inc., a New York firm in the same business as Fairbanks.