(Bloomberg) — Radian Group Inc. and MGIC Investment Corp. areamong mortgage insurers that would need to fill a financial gapunder new financial-strength rules proposed by the Federal HousingFinance Agency. The stocks dropped in New York trading.

Radian said it would need about $850 million to meet thestandard now and expects to be able to comply within a two-yeartransition period allowed under the rules. Milwaukee-based MGICdidn't provide a figure and said it faced a “material shortfall.”Genworth Financial Inc. said yesterday that it may need as much as$550 million at its mortgage insurer by June 30, 2015, to meet thestandards.

U.S. regulators are seeking to stiffen standards for mortgageinsurers that back loans sold to Fannie Mae and Freddie Mac toprevent a repeat of the losses the government-backed firms faced inthe 2008 financial crisis. Radian and MGIC said the rules are toostringent and could make it more difficult for borrowers to affordhomes.

“These guidelines create capital requirements that have thepotential of shrinking access to the very segments of borrowersthat we believe the government wants to expand homeownership for,”Radian Chief Executive Officer S.A. Ibrahim said in an interview.“They are going to be worst hit from this, one way or theother.”

Radian, MGIC and Genworth said they have ways to meet the higherasset levels, which may change in a final version of the rules. Thecompanies cited strategies such as seeking reinsurance, sellingassets, raising funds in the market or moving cash from other partsof their businesses.

“We have at Radian the ability to meet these requirements, evenas stated, without the need to raise capital,” Ibrahim said.

Goldman's View

The rules are more onerous for MGIC, because the company backsmore delinquent and older loans than rivals, according to EricBeardsley, an analyst at Goldman Sachs Group Inc. He removed thestock from his “Conviction List” today. Beardsley said thecompanies may need to raise prices, which could pressure sales.

MGIC fell 9.3% to $8.38 at 9:35 a.m. Richmond, Virginia-basedGenworth, which also sells life insurance and long-term carecoverage, slumped 5.7%. Radian, based in Philadelphia, dropped4%.

The proposed rules are tighter than expected, particularly intheir treatment of riskier borrowers, Jack Micenko, an analyst atSusquehanna International Group, said in a research note today.

'More Onerous'

“The proposal is more onerous than we expected, and we believeif finalized under current form, would hurt the recovery in housingby limiting credit expansion,” he wrote. “We expect final rules tobe less limiting than what was put forth yesterday. Realtors,lenders and builder trade groups are powerful lobbies.”

The companies have already turned to the capital markets toraise funds, so they can sell more coverage as home sales recover.Billionaire John Paulson is among the biggest equity investors inRadian, Milwaukee-based MGIC and Genworth. George Soros and KyleBass are among backers of rival firms.

To back loans packaged into securities by the U.S.-ownedmortgage-finance giants, insurers would have to hold liquid assetsworth at least 5.6% of their risk exposure, under the FederalHousing Finance Agency proposal. That compares with about 4 percentunder existing state-based rules that use a broader definition ofcapital. The new rules require holding more assets against riskierloans, such as to borrowers with lower credit scores.

Watt's View

“Mortgage insurance counterparties must be able to fulfill theirintended role of providing private capital, even in adverse marketconditions,” FHFA Director Melvin L. Watt said in an e-mailedstatement.

The rules “require mortgage insurers to hold unnecessarilyexcessive assets with potential adverse effects on creditworthyborrowers and housing policy,” MGIC said in a statementyesterday.

Mortgage insurers now face 25-to-1 risk-to-capital limits fromsome state regulators. The new rules would require Radian to holdresources equivalent to a ratio of about 12-to-1 over time, RadianChief Risk Officer Derek Brummer said on a conference call withanalysts yesterday.

Risk Reduction

The proposal is the result of a years-long effort to rewrite therules after Fannie Mae and Freddie Mac suffered losses whenmortgage-insurance companies weren't able to meet their obligationsafter the housing bubble burst. During the housing crash, abouthalf the mortgage-insurance industry was pushed out of thebusiness.

Fannie Mae and Freddie Mac have been under orders from theirregulator to reduce their counterparty risk since they were seizedby the federal government as they neared bankruptcy in 2008. Theyrequired $187.5 billion in taxpayer funds to stay afloat beforethey began posting record profits as the housing marketrecovered.

Fannie Mae, created by Congress during the Great Depression ofthe 1930s, and Freddie Mac, established in 1970 to compete with itsolder sister, keep money flowing through the U.S. home- loanmachine by guaranteeing securities that lenders sell for the cashthey can use to make more loans.

AIG, Essent

The guarantees provided by the two companies are separate frommortgage insurance, which cover losses when homeowners default andforeclosures fail to recoup costs.

American International Group Inc.'s United Guaranty Corp., thelargest seller of the coverage, said it supports efforts to bolsterconfidence in Fannie Mae and Freddie Mac. AIG, which mostly sellsproperty-casualty coverage and life insurance, slipped 0.6%.

Arch Capital Group Ltd. and Essent Group Ltd., which beganselling coverage after the crisis, said in statements that theywould be in compliance if the new rules took 'effect immediately.Another new firm, NMI Holdings Inc., said the rules are “a step inthe right direction,” and that it will be “well positioned” to meetthe standards.

The proposals were developed by Fannie Mae and Freddie Mac inconsultation with state insurance regulators and the mortgageinsurers themselves. The rules are now open for a 60-day commentperiod, and the final version will become effective 180 days afterthey're published.

–With assistance from Arie Shapira in New York.

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