Downgrade Friday continues.
In yet another sign of the continued distress in the US housing market, Standard & Poor’s downgraded its rated universe of private mortgage insurers, and mostly by multiple notches. Private mortgage insurers mostly help banks and other lenders recover their costs in the event of a homeowner defaulting on home loan payments, while some branched out into the broader business of insuring mortgage-backed securities. Unsurprisingly, their insurance payouts have soared of late.
The ratings agencies, particularly Moody’s, have been reasonably (if belatedly) agressive in their reviews of the sector.
Some extracts from the S&P statement, emphasis FT Alphaville’s:
Standard & Poor’s Ratings Services said today that it lowered itit lowered its counterparty credit and financial strength ratings on United Guaranty Residential Insurance Co. (UGRIC) to ‘BBB+’ from ‘A-’ and removed these ratings from CreditWatch with negative implications. Standard & Poor’s also placed its ‘A-’ financial strength rating on AIG United Guaranty Insurance (Asia) Ltd. (UGC Asia) on CreditWatch with negative implications while it assesses UGC Asia’s stand-alone credit profile.
At the same time, Standard & Poor’s lowered its counterparty credit and financial strength ratings on Radian Guaranty Inc. (Radian MI) to ‘BB-’ from ‘BBB+’ and its counterparty credit rating on Radian Group Inc. (Radian Group) to ‘CCC’ from ‘BB’ and removed these ratings from CreditWatch negative.
Standard & Poor’s also lowered its counterparty credit and financial strength ratings on Radian Insurance Inc. (Radian Insurance) to ‘BB-’ from ‘BB+’. These ratings remain on CreditWatch with negative implications. The resolution of the CreditWatch status of the ratings will focus on a review of Radian Insurance’s stand-alone credit profile and the value of explicit support agreements provided by Radian MI and Radian Group. Standard & Poor’s views Radian Insurance as nonstrategic to Radian MI because its product profile emphasizes nontraditional products instead of the group’s core product of first-lien mortgage insurance. Radian Insurance provides credit enhancement for residential mortgage backed securities in the U.S. and Europe, second-lien mortgages, and net interest margin securities.
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In addition, Standard & Poor’s lowered its counterparty credit and financial strength ratings on PMI Mortgage Insurance Co. (PMI) to ‘BB-’ from ‘A-’ and removed these ratings from CreditWatch negative implications. Standard & Poor’s lowered its counterparty credit rating on PMI Group Inc. (PMI Group) to ‘CCC’ from ‘BBB-’ and revised the CreditWatch status to developing from negative.
Standard & Poor’s also lowered its counterparty credit and financial strength ratings on PMI Mortgage Insurance Co. Ltd. (PMI Europe) to ‘BB-’ from ‘A-’. The ratings remain on CreditWatch negative to reflect the deterioration in the value of the support provided to PMI Europe by PMI. The resolution of this CreditWatch will focus on a review of PMI Europe’s stand-alone credit profile.
In addition, Standard & Poor’s lowered its counterparty credit and financial strength ratings on Genworth Mortgage Insurance Corp. (GMICO) to ‘BBB+’ from ‘A+’ and removed these ratings from CreditWatch negative.
We also lowered the counterparty credit and financial strength ratings on Republic Mortgage Insurance Co. (RMIC) to ‘A-’ from ‘A’ and removed these ratings from CreditWatch negative.
In addition, Standard & Poor’s affirmed its ‘BB’ counterparty credit and financial strength ratings on Mortgage Guaranty Insurance Corp.’s (MGIC) and removed the ratings from CreditWatch negative. We also affirmed our ‘CCC’ counterparty credit rating MGIC Investment Corp. (MGIC Investment) and withdrew the rating at the company’s request.
Phew. As for the rationale:
The downgrades reflect a significant increase in our estimate of mortgage insurers’ loss costs for loans insured through the flow channel and the impact this revision will have on the companies’ operating results, capitalization, and competitive positions…The key drivers of the increase in loss-cost assumptions are the increase in our assumption for peak unemployment and the sharp rise in delinquent loans.
As a result of the increase in our loss-cost assumptions, mortgage insurers’ operating results for 2009-2011 will be materially weaker than we expected in August 2008. Another fundamental change in our forecasts is the expectation for the majority of mortgage insurers to report operating losses instead of profits in 2011. However, there is still significant uncertainty surrounding the ultimate claim rates for loans insured between 2005 and 2008; therefore, it is possible that mortgage insurers could report strong operating results in 2011.