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March 3, 2009 Tuesday 10:34 AM EST

697 words


Perspectives: As Guaranty Insurers Battle Back, Feds Could Cut Lifelines

Raymond J Lehmann

WASHINGTON

It's been a tough road back from the brink for U.S. mortgage and financial guaranty insurers, slammed hard by the credit and mortgage market meltdowns of the past two years. And with the federal government's footprint growing larger by the day, those left standing are wondering if there will be anywhere reserved for them to stand.

Mortgage insurers started 2008 appearing to be in better position to actually grow their business. Many banks had ceased offering secondary, "piggyback" loans as downpayment security -- products that direct displaced PMI in the market -- and Congress passed legislation allowing many borrowers to write off the cost of insurance the same way they do mortgage interest.

But despite largely eschewing the subprime market throughout the housing bubble, the record wave of foreclosures that accompanied the bust has hit the industry hard: The proposed merger between market leaders MGIC and Radian fell apart; American International Group, the third-largest writer, suffered its well-documented problems; and at least one major writer, Triad Guaranty, has been forced into run-off.

The industry responded by severely tightening its underwriting criteria, but has faced a renewed challenge from an old competitor: the federal government. An expanded Federal Housing Administration has been taking many of the best risks away from the private market, while guaranties extended by newly nationalized Fannie Mae and Freddie Mac could leave mortgage insurers an afterthought.

For his part, the government-sponsored entities' conservator -- Federal Housing Finance Agency Director James Lockhart -- said recently that private mortgage insurers have been an important partner for Fannie and Freddie, and he endorsed offering capital support to the companies from the Treasury's Troubled Asset Relief Program. The Mortgage Insurance Companies of America also sees hope in President Barack Obama's new foreclosure relief plan, which partially uses the GSEs to rewrite terms of loans they already own, with MICA arguing in a statement that "private sector capital can and should partner with public sector capital to support homeowners across the country."

For bond insurers, the intrusion of public sector capital could be more troublesome. Traditionally one of the safest insurance segment, nearly all of the financial guaranty insurers were devastated by billions in mark-to-market losses tied to their wraps of structured securities products, with an alphabet soup of former writers -- ACA, SCA, FGIC, CIFG -- now completely wiped out. Only Assured Guaranty has emerged relatively unscathed, while former market leaders writers Ambac and MBIA have been following roughly a good bank/bad bank model by capitalizing new units to focus solely on the much safe municipal finance market.

But two further developments in Congress could significantly compromise the industry's one major lifeline. The first is legislation passed last year, and pending rules from the U.S. Securities and Exchange Commission, that would require rating agencies to evaluate municipal and private sector bonds using the same ratings scales, a change that could render moot the bond insurers' efforts to regain investment grade ratings. Even were that obstacle to be overcome, House Financial Services Committee Chairman Barney Frank and Education and Labor Committee Chairman George Miller are planning legislation that would make the federal government the default insurer of general obligation municipal bonds.

New York Insurance Superintendent Eric Dinallo, domestic regulator for most of the companies, said he still sees a future for the bond insurers by wrapping revenue bonds, but concedes the legislation would require a significant change in how the companies do business. In a letter to shareholders this week, MBIA chief Jay Brown even left the door open to returning to the scene of the carnage -- the structured finance market -- if the company could find business worth writing. After months spent trying to unwind their riskiest obligations, the companies may find there are no safe havens left open to them.

(By R.J. Lehmann, Washington bureau manager: raymond.lehmann@insurancenewsnet.org)

March 4, 2009

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