Standard & Poor's said its latest models now incorporate lending vehicles that the rating agency never saw before, which led to increased risk exposures by mortgage insurers and the current credit crisis in the housing market.
During a telephone conference call yesterday, James Brender and Rodney Clark, two analysts with the New York-based rating agency, explained the reasoning behind the downgrading of four mortgage insurers, and what the future indicators are for mortgage insurers in general.
Yesterday, S&P downgraded the insurance financial strength of MGIC Investment Corp., Old Republic International Corp., PMI Group Inc. and Radian Group Inc.
The moves were made, S&P said, because of increased claims coming from rising default rates.
Mr. Brender indicated that generally, rating deterioration is not expected on most of the insurers. However, he said Radian and Triad Guaranty Insurance (which is on rating watch) are vulnerable to additional downgrade, by one notch.
This would happen if there is serious deterioration in the firms' capital positions or abilities to maintain strong competitive positions–or both, Mr. Brender said.
It remains imperative, he said, for the mortgage insurers to have access to both government home lenders Fannie Mae and Freddie Mac customers to survive.
While a rating below "double-A-minus" has meant an insurer would not have ready access to these customers, Freddie Mac has already begun a program where the insurers will have 90 days to advise on their plan to regain their "double-A-plus" rating. The lender also said it will have sole discretion in deciding who will have access to customers.
During a question and answer period, Mr. Clark explained that the reason the companies were not downgraded earlier was because the carriers assumed risks for lending vehicles no one had seen before.
He indicated that these new lending vehicles were not known to the rating agencies when making their evaluations. That, along with a broad-based decline in the housing market, has contributed to the rating declines of mortgage insurers.
The analysts said they estimate that mortgage insurers are about half-way through the worst of the losses that they expect to suffer from the downturn in the housing market. A graph indicated steady improvement through 2009, but they would still remain above the ideal percentage of 4 percent loss cost for that year.
The analysts credited the insurers with taking quick, effective action to stem the worst of their loss portfolio and abandon the types of loan structures that led to the current crisis. However, they said it would be years before the carriers see their "triple-A" rating return.
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