John Paulson, the hedge fund manager famous for profitably betting that mortgage credit would sour, has now wagered it will stabilize.

Shares of the mortgage insurer PMI Group Inc. rallied Tuesday after Paulson's hedge fund disclosed it had bought 5 million shares in the second quarter.

The insurer's stock rose 5.4%, to $2.74 a share, at 9:31 a.m. in New York Stock Exchange composite trading. Shares of MGIC Investment Corp., the largest U.S. mortgage guarantor, rose 1.6%, to $7.50, and No. 2 Radian Group Inc. gained 2%, to $6.76.

Paulson's stake in the Walnut Creek, Calif., company makes his hedge fund the ninth-largest holder of PMI. His firm disclosed its holdings in a filing Monday with the Securities and Exchange Commission. PMI said last month that its second-quarter loss narrowed to $150.6 million, from $222.6 million the year earlier.

"The mortgage insurers are the most pure play" to bet on stabilization and recovery in the housing market, said Matthew Howlett, an analyst at Macquarie Group Ltd. "He views PMI as surviving, and it's got the largest discount to others in the group."

Mortgage insurers have tightened underwriting standards and raised prices to recover from losses that began in 2007.

Armel Leslie, a spokesman for Paulson in New York, declined to comment.

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