Mortgage Insurance Face the Music

Shares of mortgage insurers plunged today amid mounting concerns that their businesses will face huge write-downs as the mortgage markets worsens. Many such insurers have seen huge increases in missed payments on mortgage loans that have forced many of these insurers to pay up on their claims. Some have sought to raise more money through stock offerings in order to pay the bills, despite record low prices leading to record high cost. Many more have delayed filing their annual reports, as they try to calculate just how much their existing mortgages are worth now.

Despite all the doom and gloom, there still appears to be a misunderstanding of exactly how write-downs work. These write-downs are not actual losses that the company has incurred; rather, they are simply a repricing of their holdings to reflect the increased risk of losses in their existing securities. So, a $1.9 billion loss could result in a $15 billion write-down, depending on the amount of securities that they are holding. Therefore, many are now finding that such insurers are trading dramatically below their tangible book value, which many attribute to the fact that (1) people don’t understand what’s going on and (2) to a lesser extent believe more write-downs are coming.

In the end, these mortgage insurers face many more problems as the number of foreclosures continues to increase. The Fed has warned of such increases and suggested that write-downs will continue, but one has to wonder when the end comes just how undervalued these insurer stock will be.. that is, if they are still alive.

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