Insurance Quotes & Advice

A number of mortgage insurers had their financial strength ratings downgraded by Moody’s Investor Service late Wednesday.

“Everything is bleeding together,” said Rob Haines, an analyst with research firm CreditSights, pointing to a broad decline in mortgage insurance stocks after Moody’s Investors Service downgraded mortgage insurance units at AIG, PMI Group Inc. and Mortgage Guaranty Insurance Co.

Coming on the heels of market concerns on the solvency of Fannie Mae and Freddie Mac, this is not a good time for mortgage insurers or the mortgage market in general.  The worst housing slump since the Great Depression has no end in sight as more bad news seems to come every week.

The likely outcome will be a rise in premiums as insurers’ attempts to raise additional capital to cope with rising foreclosure and default rates will be hampered by the credit downgrades.  Even the investment grade rated debt of the two government sponsored agencies are trading as if their ratings were significantly lower.

Until the market receives a definitive signal on the likelihood of a government bailout if things grow worse for the two mortgage agencies, you can expect the negative outlook to continue for all mortgage related insurers.  Although it is doubtful the government would let them fail, investors are remaining cautious and the stock of the mortgage insurers have faltered as a result.

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. 

With the tax deadline fast approaching many recent  home buyers may not be aware that premiums for private mortgage insurance(PMI) paid in 2007 are tax deductible as mortgage interest.  It was included as a provision in the Tax Relief and Health Care Act of 2006.

Banks would normally require home buyers to purchase private mortgage insurance, when they have less than a 20% for an initial down payment.  The tax change was primarily approved as a way to help out mortgage insurance companies, who were losing out on business because it was cheaper for most people to take out piggyback loans.

People were avoiding the PMI by basically taking out two mortgages, one for 80% and another for the remainder.  Since the interest payments for both mortgages were tax deductible, it was usually a cheaper alternative to the PMI which could be quite expensive depending of the credit rating of the borrower and the amount of the initial down payment.

After the changes took effect the purchase of PMI became viable again because the piggy backed mortgage would normally have a much higher interest rate than the primary mortgage.  Although housing prices have fallen sharply many families are still unable to afford the regular 20% down mortgage so the tax changes benefits a significant number of lower income households.

Unfortunately anyone that purchased a home prior to 2007 won’t qualify for the deduction unless they had refinanced their mortgage last year.  Also, only those households with an adjusted gross income of $100,000 or less qualify for the full deduction.

While the tax break was initially to last only a year the deduction was extended for three more years in the Mortgage Forgiveness Debt Relief Act of 2007.