Why These 3 Insurers Are Tanking Today

Proposed capital rules by the FHFA have cause mortgage insurers to take a nosedive

Jul 11, 2014 at 1:12PM

The mortgage insurance industry is in the midst of a bloodbath at the moment, with Genworth Financial Inc (NYSE:GNW), Radian Group Inc (NYSE:RDN) and MGIC Investment Corp. (NYSE:MTG) taking an incredible beating following an announcement yesterday from the Federal Housing Finance Agency. 

The cause of all the distress is a 54-page document outlining the FHFA's proposals regarding just how currently approved mortgage insurers will be expected to measure up in the future – if they plan to continue insuring mortgage loans with down payments of less than 20% backed by Fannie Mae and Freddie Mac, that is.

Capital requirements
At the heart of the matter is the requirement that approved insurers carry more capital, a sore spot for an industry just beginning to recover from a near-death experience during the financial crisis. Though legacy delinquent loan inventory continues to drop off – Radian recently reported approximately 49,000 bad loans at the end of June, compared to the year ago inventory of over 78,000 – the new rules will definitely sting. 

Radian and MGIC have not taken kindly to the new proposals, and have been quick to criticize them. The joint response issued on Thursday notes the backlog of troubled policies that still burden the insurers, and complains about the new requirements that they hold liquid assets of 5.6% of their credit risk exposure. Both companies appear to consider the capital rules excessive. 

In its own response, Radian states that it will be addressing its concerns to the FHFA during the comment period, which runs to September 8, noting that the agency's new proposals "are inconsistent" with its stated goal of making mortgage credit more widely available.

Genworth has responded to the FHFA's announcement with a more moderate tone, noting that it plans compliance with proposed capital rules by June 30, 2015. The insurer estimates that, in addition to the $300 million already set aside, it will need another $450 million to $550 million to comply – which won't be a problem, considering the company's "variety of additional capital sources".

Not set in stone
Although the rules are just preliminary, the concerns of these companies are valid. With the difficulties of the past still weighing upon them, any new burden will not be welcome. While both Radian and Genworth saw their stock prices drop by around 5% within the first two hours of trading on Friday morning, hard-hit MGIC toppled by nearly 13%, likely not helped by an early morning downgrade by Goldman Sachs. 

After the initial shock abates, however, things should begin to look up for these insurers – particularly Genworth, which exhibited the least amount of panic regarding the proposed rules. Probably, the input from the industry will soften the edges of the FHFA's requirements, as well. For the moment, however, the bloodletting continues.

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Amanda Alix has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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