Mortgage Insurance Giants Collapse Could Trigger Stock Market Panic

Mortgage Insurance giants PMI, MGIC, and Radian, are on the verge of collapse as claims surge. Mortgage insurance companies stock losses are the possible trigger to another stock market crash.

Mortgage Insurance Company Demise Discussed

New York Governor and former consumer champion, Eliot Spitzer discuss the demise of the big mortgage and bond insurance companies on Jim Cramer’s Mad Money last Friday,

“Without capital infusion, these insurers could collapse and create a ‘tsunami’ in the market.”

Spitzer goes on to say,

“Once again the Fed and Treasury haven’t been as quick of the dime as they should have been. The market needs rule. Otherwise you anarchy”

Cramer and Spitzer discussed the administration’s stimulus package and agreed it will have no effect on these important mortgage insurance companies.

I happen to agree for once with Cramer on this point.

But there is something more important in the weakening of mortgage insurance companies.

Mortgage insurance companies not only insure mortgages but also the bonds backing mortgage backed securities, so a lot is on the line should they go under.

The reverberations for mortgage lenders is clear once their foreclosures aren’t made whole by the mortgage insurance. However, what is unclear is how the stock, bond, and capital markets react once their bad investments are not made whole either.

Remember Fannie Mae (FNMA) Is Just Another Mortgage Insurance Company

This news doesn’t bode well for the nations largest “quasi-government” mortgage insurance companies, Fannie Mae and Freddie Mac.

As a nation with a big stake economically in our housing market, should these “private” mortgage insurance companies go under, the biggest loser will be the stock market…and maybe a little trickle down to the consumer.

But if our “public” mortgage insurance companiew go under…Fannie Mae, Freddie Mac, and Ginnie Mae…we are all in real trouble.

Is Fannie Mae any more solvent than PMI, MGIC, or Radian?

My opinion: Not one bit!

And now with the stimulus package passing allowing Ginnie Mae’s FHA program to be the dumping ground for bad subprime and Fannie and Freddie’s expansion into the high risk jumbo loan amounts, we’ve allowed this “anarchy” to spread. Mr. Spitzer should say, no rules or “bad” rules create anarchy…and allowing the expansion of both of these “publid insurers” to speculate in markets they have no business being in…could not only cost Wall Street fat-cats, but now it could cost us all on Main Street.

Mortgage Insurance Losses Are Mounting

MGIC the leading mortgage insurance company, just posted $1.47 Billion for the last quarter of 2007. Radian another mortgage insurance giant, posted a fourth quarter 2007 loss of $618 Million.

These two mortgage insurance behemoths attempted to merge last fall in a failed attempt to instill confidence and no doubt attract more capital…but to avail.

So now they are stuck trying to mop up their own mistakes individually…making a collapse more likely.

I shorted these mortgage insurance companies along with PMI back in the fall of 2006 when everyone was still “absolutely sure” they were a good bet.

Take a look at my “short portfolio” on these companies. Remember when looking at “short” trades a “gain” or green number is when the stock drops…I was betting on them dropping, so I “gained”.

As you can see, each of these monster mortgage insurance companies have fallen dramatically in just 18 months or so…62%, 69% and 74%, respectively.

Needless to say, if you knew what I knew back when these stocks were trading at $57, $43, and $60, you could have shorted them too profiting all the way down.

That’s why they pay me the big bucks…haha…and it’s why you keep reading this website.

Good Luck!

Author: Rob K. Blake
Published February 19, 2008
Modified February 26, 2008

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