Shares of Radian Group (NYSE: RDN ) reached a 52-week high yesterday. Let's take a look at how it got here to find out if it can radiate even higher.
How it got here
Radian got an early Christmas present from the government's mortgage buyer Freddie Mac last week. It gifted the company's Radian Mortgage Assurance unit a one-year extension of its approval as a limited eligible mortgage ensurer. This matches a similar green light from Freddie's cousin Fannie Mae. Both approvals now expire December 31, 2013.
That extension represents, if you will, an insurance policy to keep selling insurance -- the approval allows Radian a means to keep selling its products through Mortgage Assurance if its other units bump up against regulatory limits for risk in relation to capital.
Radian's reason for existence, after all, is writing coverage for mortgages, so approvals like this make a difference. It's little wonder that the shares saw a nice pop of 5% the trading day after the announcement was made.
A bounce from the bottom
The company's buy-and-hold investor types are particularly grateful for the news, as their stock has taken them on a queasy, up and down and backwards and forwards ride in 2012. As recently as this past May, the stock was barely treading water above $2.
This was because the municipal bond market, in which Radian was once an active player, got socked with a nasty one-two punch. This was the defaults of the cities of Stockton, California, and Pennsylvania's capital of Harrisburg, two high-profile flops that occurred within months of each other.
This spooked investors -- how many more defaults could be gushing down the pipeline, and how much of a blast would the insurers take?
That was the low point of Radian's 2012 journey. That changed when a major shareholder, Clinton Group, called on the company to either release detailed information about its operations or consider a sale. Clinton intimated that it knew of at least one potential buyer, which just happened to be willing to pay a premium to the current stock price. Predictably, said price went up.
And it gained momentum soon thereafter when the housing market started to show greater improvement. An increase in mortgages begets more insurance policies, of course, and Radian and its peers benefited handsomely.
It soon came to light that this past April, it and fellow beleaguered insurers MGIC Investment (NYSE: MTG ) and Genworth Financial (NYSE: GNW ) collectively wrote $7.1 billion worth of fresh policies. This bettered March's total by $400 million and was a vast (92%) improvement over April 2011's number.
Another jolt to the share price was provided in early September, when the company revealed better-than-expected monthly metrics. Oh, and that it would realize $120 million in gains on investment securities in its portfolio. Considering that Radian had posted $206 million and $239 million in total revenue in its previous two quarters, that chunk of change was bound to have an impact.
And it did -- 3Q saw the company net its first profit (at $14 million) since the 3Q of the previous year.
Finally, the company ended 2012 on an encouraging note, with that Freddie Mac nod. Profits, big mortgage player approval, stacks of new policies flying out the door... that was the news immediately behind Radian as it closed out the year. As a result, the stock now trades around $5.64 a share, not bad for an unloved issue that could be had for two bucks a pop only months ago.
If the general state of mortgage origination and servicing keeps improving, Radian should continue to benefit. Particularly after the nasty housing crisis of the late 2000s, every lender has a vested interest in covering their housing loans with proper insurance.
And there's a growing number of such loans to cover. Interest rates are irresistibly cheap for potential homeowners, the economy is improving, and employment is rising. So, more people are grabbing mortgages.
Consequently, the nation's large-scale housing lenders, like Wells Fargo (NYSE: WFC ) , are raking it in by providing them. The leading mortgage bank saw originations shoot ahead 56% on a year-over-year basis to $139 billion in 3Q, helping the company post record earnings in the quarter.
It should be kept in mind, though, that housing hasn't yet made a full recovery, and at least a few big financial players expect that the current rally won't last.
And others are critical of the way the company has conducted its business of late, accusing it of refusing to pay some claims in full. Standard & Poor's says it "expect[s] operating losses to continue into 2014 and, barring more significant improvement in the job markets, may continue even longer."
The company's investors don't seem to share that pessimistic outlook, but then again, the view's always better when you're climbing. Whether Radian shares have reached the summit or have higher to go depends heavily on the growth of the mortgage market and the firm's ability to take advantage of it.
Speaking of taking advantage, Wells Fargo has been pocketing many millions of dollars through the sale and refinancing of those mortgages Radian loves to insure. To find out much more about Wells Fargo, I invite you to download our premium research report on the company from one of The Motley Fool's top banking analysts. Click here now for instant access to this in-depth take.