Mortgage Insurers: The Next Shoe to Drop?

At the end of 2007, mortgage insurer MGIC had $212 billion of insurance in force. And it's not performing well: in the fourth quarter alone its claims reached $1.3 billion. The value of the entire company, according to the stock market, is about $1.4 billion, and falling - its shares are down more than 75% from their 52-week high.

In such a context, it would hardly be surprising if MGIC's customers are a little bit wary about relying on it for mortgage insurance. The only reason to buy insurance off anybody is if you're quite sure that the insurer is going to be able to pay out in the event of a claim. And given what's happening to the monolines, insurer counterparty risk is top of everybody's mind right now. Besides, people only take out mortgage insurance when they take out a mortgage, and that activity has slowed dramatically as the housing market has slumped.

But the crazy thing is that MGIC and its fellow mortgage insurers are doing brisker business than ever.

Even as losses mount, mortgage insurers' sales are climbing as lenders require more borrowers to buy the coverage. The association's members wrote 141,588 policies for homeowners last month, up 57 percent from a year earlier.

I think what we're seeing here is true desperation on the part of the lenders. Their underwriting muscles have atrophied for lack of use: while they'd like to be able to simply unilaterally beef up their underwriting, they have little faith in their ability to do so. So they plump for the next best thing: getting their mortgage payments guaranteed by an insurance company, passing the underwriting buck along the chain to someone else.

And the insurers' underwriters? Are they confident that they're doing their job better now than they were a year ago, even in the face of a sharp spike in applications for new policies? I'm not.

If there's one thing we learned from the 2007 subprime mortgage vintage, it's that the mortgage industry is a tanker which is very hard to turn around. If mortgage insurers are writing more policies than ever, my guess is that they're writing more bad policies than ever. If the monolines collapse, the mortgage insurers could be next.