Mounting losses and the threat of credit-rating downgrades are hitting another obscure corner of the insurance industry – mortgage insurance – and adding to strains on the housing market.

Rising claims on policies mortgage insurers sold during the housing market boom are hitting hard. MGIC Investment Corp., a Milwaukee-based firm that is the largest mortgage insurer in the country by market share, said this week that it posted a $1.47 billion loss in the fourth quarter. A much-smaller rival, Triad Guaranty Inc., based in Winston-Salem, N.C., this week reported a $75 million quarterly loss.

Investors have punished the stocks the past year, sending the shares of some down 90 percent.

But the mortgage insurers are not in danger of going bust, and their travails aren’t causing widespread problems in the financial system. They are getting help, in the form of higher rates, tighter underwriting standards and, Thursday, a move by Freddie Mac that should allow them to rebuild capital.

The problems are forcing mortgage insurers to adopt stricter underwriting standards. MGIC, for instance, won’t insure borrowers who won’t put down at least 5 percent in four states – Arizona, Florida, California and Nevada – and major metropolitan areas in many others. The change is already in effect in Florida and California and will take effect in the other places in March.

The result of such moves is that some people who have trouble scraping together a down payment - typical mortgage-insurance customers – could find it harder to purchase a house. The tightening is “another thorn in the consumers’ side,” says Ivy Zelman, chief executive of Zelman & Associates, a housing research firm.

In a conference call with investors this week, Curt Culver, MGIC’s chief executive, acknowledged that the firm could get less business as a result of underwriting changes and higher prices for some policies. But he called that business “better lost than insured.”

Mortgage insurers sell policies that promise to repay a certain percentage of the loan, usually 25 percent to 35 percent, if the borrower defaults. Lenders often want borrowers who can’t make a customary down payment, usually 20 percent, to buy the insurance. Freddie Mac and Fannie Mae, government-sponsored firms that buy up many of the nation’s mortgages from lenders, rely on the insurers to cover part of their risks for loans that total 80 percent or more of a home’s estimated value.

With more homes going into foreclosure, mortgage insurers are seeing losses mount. Falling home prices make the situation worse, because it becomes that much harder to recover losses from the sale of a house that has been foreclosed on.

On Thursday, in a demonstration of concern about the insurers, Freddie said it will suspend its policy of imposing tighter capital requirements and other restrictions on mortgage insurers if their ratings are cut below double-A - or the equivalent. Ratings services have said in recent weeks that a number of the mortgage insurers face the prospect of downgrades.

Freddie also imposed a 25 percent limit on the amount of premiums the insurers can pass on to so-called captive insurers, which are generally owned by mortgage lenders and cut into the profits of mortgage insurers because they were forced to split their premiums with the mortgage lenders. In recent years, the captives have often grabbed 40 percent of the premiums.

Freddie says the mortgage insurers will be able to rebuild their capital faster if they retain more of the premium income.

Freddie is “making it very clear that they see an ongoing role” for the mortgage insurers, says Howard Shapiro, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York. “There is a public-policy imperative” to maintaining mortgage insurers, he says.

A Fannie spokesman said the company is “evaluating a set of options” regarding the mortgage insurers.

Weakened mortgage insurers could create an opportunity for investors with deep pockets, because demand is driving up mortgage-insurance prices. Warren Buffett’s Berkshire Hathaway has profited by swooping into stressed insurance markets under such circumstances in the past, and recently announced plans to start up a new bond insurer.

The current problems are also cutting into insurers’ available capital. With less money on hand, they may not be able to write as many policies, which could also hamper any housing recovery by making it more difficult to find the protection.

“Even though there’s opportunity now with attractive pricing, they’re going to have to be more disciplined in the business they take on,” says Thomas Abruzzo, a managing director at Fitch Ratings

A lawyer for three new Florida homeowners has filed a lawsuit in state court challenging the portability portion of the Save Our Homes Amendment.

The plaintiffs, homeowners in Tallahassee, Port Charlotte and North Palm Beach, are also seeking tax refunds for themselves and other recent homebuyers, which could cost local governments and school districts billions of dollars.

Save Our Homes caps annual assessment increases at 3 percent for primary homes, or homesteads. That means the plaintiffs and other recent homebuyers are paying much higher taxes than longtime residents with homes of the same or similar value.

The amended lawsuit alleges Amendment 1, which voters adopted Jan. 29, increases the disparity through a “portability” provision that lets homesteaders take their Save Our Homes benefits with them when they move.

A state judge in Tallahassee last year dismissed a similar lawsuit by out-of-state owners of second homes in Florida that challenged Save Our Homes on grounds that it violates anti-discrimination provisions of the U.S. Constitution. An appeal is pending.

Gov. Charlie Crist, who touted the plan, said Wednesday he was confident the new tax-cutting proposal will withstand a legal challenge.

“Part of my confidence is based on the fact that Save Our Homes has been in existence since 1992,” Crist said. He said Amendment 1 is “an extension of that.”

Orlando and Jacksonville are among the 10 best cities for bargain house hunters, according to Forbes magazine. The editors define a bargain market as one where employment growth will burn off an over-abundance of inventory quickly. In naming Orlando to the No. 3 spot, the magazine noted that Orlando had fewer speculators than Miami and Tampa, and that it’s adding jobs faster than those cities as well. At No. 8, Jacksonville’s foreclosure rate is lower than most other major Florida cities, which will help reduce inventory levels. 

The proposed Hometown Democracy constitutional amendment — which would require all zoning ordinance changes to go before voters — did not secure enough verified petition signatures for the November 2008 ballot. The group needed 611,009 verified signatures. Florida’s Secretary of State verified 545,827 — 65,182 shy of the mark. Hometown Democracy supporters pledge to press ahead to obtain enough verified petition signatures to get the measure onto the November 2010 ballot.

Beginning next month, MGIC Investment Corp., the country’s largest mortgage insurer, will reduce its exposure in weak housing markets by requiring at least 5 percent down on homes in what it calls restricted markets.

These markets include the entire states of Arizona, California, Florida, and Nevada, as well as the metropolitan areas of Washington, D.C., Detroit, Chicago, Boston, and Atlanta.

Home owners hoping to insure condos will have to put down 10 percent.

The company also will refuse to insure mortgages with little or no documentation, nor will it insure investment property loans in restricted areas. Home owners in the restricted markets who put down 10 percent will have to have FICO scores of at least 620 out of a possible 850. If they put down less, their scores will have to be at least 680.

Home owners typically must get mortgage insurance when they put down less than 20 percent of their home’s value.

MGIC expects the new requirements to result in the issuance of fewer new policies, according to its filing with the Securities and Exchange Commission.

Competitor PMI Group Inc. also announced in a filing that it would stop covering home loans with loan-to-value ratios of more than 97 percent.

This afternoon President Bush will sign the Economic Stimulus package into law. Last week, Congress gave overwhelming final approval to the Economic Stimulus Package supported by NAR (National Association of Realtors) and REALTORS® across the country. As a result, the government will be sending payments to most American households and grant tax incentives for business investment.

The legislation includes the requested GSE and FHA limit increases strongly backed and lobbied by NAR. The increased GSE loan limits means borrowers will see immediate relief with new liquidity in the mortgage market and the nation will see an additional 300,000 home sales. The increased FHA loan limits means an additional 138,000 Americans will purchase homes, and with the needed FHA reforms means 200,000 families can refinance their homes safely and affordably.

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