Investing in Housing: Are Mortgage Insurance Companies the Next to Fall?
By Ian Cooper
Sub-prime fallout is far from over. Neither is the spillover into Alt-A loans. And there’s no telling what kind of impact sub-prime mortgages will have on mortgage insurance companies, like PMI Group (PMI:NYSE).
Pathetically, there are reports where income and even assets were left off of applications on mortgages given to just about anyone. This happened with sub-prime loans, and it’s happened with Alt-A companies. However, while the lender is most likely faulted for making such a bad loan, it’s the mortgage insurer that can be hurt, too. But that all depends on whether the mortgage insurer gets to keep the insurance premium. If not, we wouldn’t be surprise to see earnings problems at the PMI camp, for example.
Unfortunately, it looks as if mortgage problems are already wreaking havoc. According to a Financial Skeptic blog, “In the just recently filed 10K PMI Group (NYSE:PMI) reports an increase in loss and loss adjustment (That’s the money they actually lose as an insurance company) in ’06 over ’05 of 17.5%. This is double the comparable ’05 over ’04 increase which was 8.6%. So the year over year trend was like a fast bullet train leaving the station. The real indicator was PMI’s 10Q filed Nov 07, 2006, which showed a Q3 06 over Q3 05 increase of 29% in loss and loss adjustments. That was probably the real tip off of the coming storm.”
Plus, the 10K states that, “If the volume of low down payment home mortgage originations declines or if the number of mortgage loans originated and purchased by the GSEs continues to decline, the amount of insurance that PMI writes could decrease, which could result in a decrease of our future revenue.” Worse yet, the company, according to the 10K, expects higher default rates for loan to value loans, ARMs, Alt-A loans, interest only loans, payment option ARMs, and less than A-quality loans.
What may be most telling of things to come are recent insider sells at PMI, for example. It’s been reported that L. Stephen Smith, CEO of PMI exercised options and sold 10,000 shares, after selling more on February 6, February 2, January 3, 2007, and December 7, 2006, according to the above referenced blog. And it seems as if the company’s EVP has been selling, too.
If we’re correct, things are likely to go downhill from here for mortgage insurance companies, like PMI.
Take care,
Ian L. Cooper, Editor, Death Cross Trader
| |