MGIC's Woes Multiply on Rising Mortgage Losses

The United States' biggest mortgage insurer, MGIC Investment (NYSE: MTG  ) , reported a second-quarter loss recently as loan defaults jumped. The Milwaukee-based company has now reported losses for four straight quarters.

The housing slump, frustratingly high unemployment, and a shaky economic recovery have all played their part in adding to the mortgage insurer's woes. MGIC has not seen yearly profits since 2006 due to the foreclosure crisis.

The housing slump
MGIC saw losses as Americans struggled to pay off their mortgage requirements, reflecting the broader weakness prevalent in the economy. Rising foreclosures have posed a serious threat to these mortgage insurers.

Radian Group (NYSE: RDN  ) and PMI Group (NYSE: PMI  ) have struggled, as their business is confined to insurance coverage. On the other hand, companies such as Genworth Financial (NYSE: GNW  ) and AIG (NYSE: AIG  ) have fared comparatively better because they are more diversified in nature and not as reliant on mortgage insurance issuance. Though these companies are exposed to the same conditions, they have the added advantage of falling back on other lines of business.

A brief look at the numbers
MGIC's revenues for the quarter fell 12% to $374.8 million from $417.0 million a year ago. It posted a loss of $151.7 million, compared to a profit of $24.6 million in the same quarter last year. This was mainly because the company had to pay more to shield against unpaid mortgage loans. This figure went up to $459.6 million from $320.1 million, an increase of 44% from a year ago.

Although losses grew this quarter on a year-over-year basis, the proportion of delinquent loans to total loans (leaving aside bulk loans), was 13.4% as of June 30, compared to 14.9% as of Dec. 31, 2010. This implies that its asset quality may be gradually improving, which would result in fewer defaults in the future.

The Foolish bottom line
Despite huge losses suffered this quarter, MGIC's chief executive Curt Culver said he believed that the worst was possibly over and that the amount it would have to pay to cover for loans will reduce. But this remains to be seen. Freddie Mac recently said that though unemployment still remained at a high 9%, the housing sector would probably not see a "double dip" and it would follow the trends of the overall industry.

Of course, it's all speculation for now, and we have to wait for economic conditions to improve. It's going to be a long wait-and-watch game. 

Fool contributor Shubh Datta doesn't own any shares in the companies mentioned above. The Motley Fool owns shares of American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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