Tough Times For Mortgage Related Insurers
It’s been a rough few months for insurance companies that have any connection to the residential mortgage market. Yesterday, MarketWatch reported that Moody’s issued a ratings warning for Ambac and MBIA in the bond insurance sector and reported today that Fitch downgraded MGIC and PMI in the mortgage insurance sector.
For Ambac and MBIA especially, a ratings downgrade could signal a deathblow to the two companies.
“They have no future,” said Sean Egan, chief ratings officer at Egan-Jones Ratings, a rating agency that’s paid by investors rather than issuers. “They will argue otherwise but as a practical matter they don’t have a future.”
Bond insurers rely on their top ratings to sell guarantees on various types of debt, including municipal bonds, corporate bonds, mortgage-backed securities and collateralized debt obligations, or CDOs.
You can expect disruptions to financial markets to continue as investor skepticism continues to surround all bonds guaranteed by the troubled insurers. If they are downgraded it will be difficult for both companies to raise additional capital with the higher borrowing costs associated with the lower ratings
Losses in the private mortgage insurance sector have caused rates to rise in recent months and has made it more difficult for potential home buyers with less than the standard 20% down payment. Coupled with tighter lending standards overall, demand has been constricted at a time when it is desperately needed.
The mounting losses for these two sectors are the main reason why the subprime collapse has already cost the insurance industry as whole more than what was paid out for the Hurricane Katrina disaster. And with no signs that the housing market is going to improve anytime soon, losses for both sectors are expected to continue for the foreseeable future.
