Credit analyst advises avoiding Radian on MGIC ties, mortgage industry questions

By Ronda Fears

Nashville, Tenn., Sept. 17 - Radian Group has a strong balance sheet but given its close relationship with MGIC Investment Corp. and trouble facing the mortgage insurance industry, Kathy Shanley, senior bond analyst at Gimme Credit, suggests investors avoid the credit.

"Radian's debt load is modest and upcoming maturities are small ($75 million early next year)," Shanley said in a report Tuesday.

"But given the potential, and unpredictable, risks of its joint ventures, in an environment of rising mortgage delinquencies, we would avoid both Radian and MGIC."

Shares of Radian (A2/A) fell 12% on concerns that the warning issued by MGIC is a harbinger for other mortgage insurers.

Radian is among the largest private mortgage insurers although it is not a pure monoline as about 18% of its income in the first half came from its financial guaranty business. But mortgages and mortgage services still account for the bulk of earnings.

Radian is a partner with MGIC in two joint ventures that invest in delinquent single-family mortgage loans and unsecured consumer assets, Shanley noted.

"The quality of assets held in the joint ventures is difficult to measure, but with mortgage delinquencies climbing, Radian's indirect exposure to sub-prime risk is a growing concern," she said.

"Many of the same trends influencing MGIC's results also are apparent at Radian."

Even before refinancings accelerated this summer, she said, Radian reported persistency fell to 59.3% for the 12 months ended June 30 from 72.6% for the prior year.

MGIC's persistency rate was 59.5% at the end of the second quarter.

As at MGIC, the analyst said, Radian's recent business mix has shifted to include a somewhat higher percentage of non-prime business, including Alt A (low documentation) and sub-prime loans.

Non-prime loans accounted for 33% of the new primary insurance business for the first half, as opposed to 27% for the same period last year.

The percentage of total loans in default rose to 3.50% at June 30 from 2.71% a year ago and is similar to the 3.60% delinquency rate reported by MGIC.

"We expect trends will be similar at both firms. MGIC already said last week its delinquency rate as of August had climbed to 3.88%," Shanley said.

"Like MGIC, however, Radian does not set aside reserves for future claims against loans that are not already in default, increasing the risk for continued earnings pressure if current delinquency trends persist, especially as about two-thirds of the primary policies outstanding haven't yet reached their peak loss years."

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