Those losses have also dinged their relationships with mortgage-financing giants Fannie Mae and Freddie Mac, which the insurers depend on for business.
The mortgage insurance industry is dominated by a half-dozen large firms that insure loans when a buyer makes a down payment of less than 20 percent of a home’s purchase price. If the borrower defaults, the insurers pay the lender a portion of the loss. Insurers "are a relatively unknown portion of the mortgage market, but could be another wrinkle for mortgage lending," said Steve Stelmach, an industry analyst with Friedman, Billings, Ramsey Group.
Challenges facing the industry are significant. Shares of Radian Guaranty, Triad and PMI Mortgage Insurance have lost 90 percent of their value in the past year. Milwaukee-based Mortgage Guaranty — the industry’s largest player — lost $97.9 million during the second quarter, but its $4.2 billion in reserves is enough to pay claims and pursue new business, said vice president Mike Zimmerman. The industry is also tightening its standards to avoid more losses on new loans. For a while, it seemed private mortgage insurers could become obsolete. Facing competition, the industry began to provide insurance for subprime loans bundled by lenders and sold to investors, analysts said. The mortgage-finance giants often buy loans with a less than 20 percent down payment and then offset the risk with an insurance policy.
A strong relationship with Fannie Mae and Freddie Mac is critical to the industry’s survival, Cecala said.