Credit Agency Downgrades U.S. Mortgage Insurers

April 9, 2008

Standard & Poor’s Ratings Services Tuesday downgraded four U.S. mortgage insurers, including MGIC Investment Corp’s arm, citing a worse-than-expected housing slump.

The credit agency said most companies would not generate an underwriting profit until 2010, putting pressure on their capital. The downgrades may prevent some insurers from doing business with Fannie Mae and Freddie Mac, it said.

“The downgrades reflect weaker-than-expected results for the fourth quarter of 2007 and the continued deterioration in key variables that influence claims for mortgage insurance,” Standard & Poor’s credit analyst James Brender said in a report.

The agency said it now expects home prices to decline 20 percent from the peak in 2006 compared with an 11 percent drop it projected last November. It also sees unemployment rising to 5.8 percent in 2009.

Because of the deteriorating housing and job markets, mortgage insurers’ operating results for 2008 and 2009 will be worse than expected, Standard & Poor’s said.

The rating agency cut its counterparty credit rating on MGIC Investment Corp to “BBB” from “A-minus” and its counterparty credit and financial strength ratings on mortgage insurance units to “A” from “AA-minus,” it said in a report.

Curt Culver, MGIC’s chairman and chief executive, said in a statement: “We do not expect the ratings change to impact MGIC’s business relationships with the government sponsored enterprises or our mortgage insurance customers.”

S&P also lowered its counterparty credit rating on Old Republic International Corp to “A” from “A-plus” and its counterparty credit and financial strength ratings on the company’s core subsidiaries to ‘AA-minus’ from ‘AA.’

At the same time, S&P cut its counterparty credit rating on PMI Group Inc to “BBB-plus” from “A” and its counterparty credit and financial strength ratings on PMI Group’s mortgage insurance subsidiaries in the United States and Europe to “A-plus” from “AA.”

The agency maintained a negative outlook on these companies.

Finally, Standard & Poor’s downgraded its counterparty credit rating on Radian Group Inc to “BBB” from “A-minus” and its counterparty credit and financial strength ratings on Radian Group’s mortgage insurance subsidiaries to “A” from “AA-minus.” These ratings remain on CreditWatch with negative implications.

Fannie Mae and Freddie Mac, the top providers of U.S. home mortgage financing, will decide whether the mortgage insurers are still eligible to insure loans purchased by the two government sponsored enterprises (GSEs), the agency said.

S&P said it would likely downgrade any mortgage insurer that loses its eligibility to insure mortgages sold to the GSEs.

Some mortgage insurers will likely need to raise more capital to support their current level of new business because claims from existing business will deplete some capital, the agency said.

(Additional reporting by Ilaina Jonas; Editing by Braden Reddall)

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