Tags: Essent | Soros | Goldman Sachs | mortgage

Soros-Backed Insurer Tops Paulson Bets as Rules Loom

Tuesday, 26 August 2014 11:14 AM

Essent Group Ltd., the mortgage insurer backed by George Soros and Goldman Sachs Group Inc., is beating older rivals in the stock market as the U.S. plans to tighten regulation of the industry.

Essent has rallied 10 percent since July 10, when the Federal Housing Finance Agency laid out a proposal requiring mortgage guarantors to hold more assets. Radian Group Inc. and MGIC Investment Corp., the largest firms that focus on backing home loans, have slumped.

FHFA called for stiffer requirements tied to insured loans made from 2005 to 2008, before Essent and NMI Holdings Inc. began writing coverage. The proposal also mandates that insurers hold more funds on contracts connected to riskier borrowers. The U.S., which took over Fannie Mae and Freddie Mac in a $187.5 billion rescue after the housing market collapsed, aims to protect taxpayers from losses in a future crisis.

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“For companies like MGIC or Radian, where there’s a legacy book, the capital rules are just more onerous,” Bose George, an analyst at Keefe, Bruyette & Woods, said. “Where there’s no legacy book, the rules are less onerous.”

MGIC and Radian have said the proposed private mortgage insurer eligibility requirements, or PMIERs, are too strict and threaten to make home loans less affordable. Essent and NMI have praised the rules, saying the industry needs the financial strength to withstand another housing crash.

Credit Access

“We do not believe that the PMIERs will disrupt access to credit,” Essent Chief Executive Officer Mark Casale said on a conference call this month. “It’s important to make sure there’s really no watering down of the framework.”

Soros Fund Management owns an 8.7 percent stake in Essent valued at $160 million, based on yesterday’s $21.26 closing price, and Goldman Sachs controls about 7 percent, according to data compiled by Bloomberg. Bermuda-based Essent’s largest investor is affiliated with Pine Brook Road Partners, a private-equity firm. All were investors in Essent before the insurer’s initial public offering last year.

Billionaire John Paulson’s hedge fund firm is among the top five investors in MGIC and Radian, with combined stakes valued at about $300 million. Paulson & Co. also controls 1.8 percent of Genworth Financial Inc., which sells life insurance and long-term care coverage in addition to mortgage guarantees.

MGIC has fallen 10 percent since the rules were announced while Radian has slipped 2.2 percent. The shares of both companies have more than doubled since the start of last year as the housing market rebounded.

Genworth Dives

Genworth has plunged 18 percent since July 10, fueled by a disclosure that it may need to add to reserves in its long-term care business. The Richmond, Virginia-based company counts mortgage insurance among its best business opportunities, CEO Tom McInerney said July 30.

Rohit Gupta, who runs Genworth’s U.S. mortgage insurer, said in an interview that the new rules will help bolster confidence in the industry. He said that there is room for tweaks and declined to discuss Genworth’s positions before the fourth-largest mortgage insurer sends in its feedback to FHFA.

Mortgage insurance typically must be purchased by borrowers when their down payment is less than 20 percent of a home’s purchase price. The policies cover losses when borrowers default and foreclosure fails to recoup costs. During the housing crisis, the financial turmoil at mortgage buyers Fannie Mae and Freddie Mac was magnified when about half of the home-loan guarantors were pushed out of business.

Companies must submit their comments on the proposal by Sept. 8. The new rules affect firms doing business with Fannie Mae and Freddie Mac, which are overseen by FHFA.

Higher Fees

“The draft PMIERs would require insurers to maintain liquid assets far in excess of the amount required to achieve that goal and could potentially have adverse effects on creditworthy borrowers and mute the housing recovery,” Curt Culver, CEO of Milwaukee-based MGIC, said on a conference call with analysts last month.

At a time when lending remains restricted, the proposed rules could make homeownership more expensive for borrowers without the highest credit scores or lacking funds for a big down payment. The insurers would likely charge higher fees to these riskier borrowers.

Culver also criticized his company’s younger rivals for their stance on the rules.

‘Very Disappointed’

“I’m very disappointed with some of our newer entrants, on a very shortsighted point of view, lobbying the way they have,” he said. “This is the long-term interest of all of us to have returns that are long-term acceptable.”

Casale worked at Philadelphia-based Radian before founding Essent, which went public in October and is now the No. 5 U.S. mortgage insurer. It wrote coverage on $9.5 billion of loans in the first half of this year, according to data compiled by Inside Mortgage Finance, a trade publication.

NMI, which also held a public offering in 2013, is off to a slower start, with less than $1 billion of coverage sold in the period. The Emeryville, California-based firm, whose biggest investors include Carlyle Group LP’s Claren Road Asset Management LLC, Kyle Bass’s Hayman Capital Management LP and Perry Corp., has declined 6.6 percent since July 10, extending its decline this year to 24 percent.

“We can do very well in an environment that has rules basically as drafted,” Brad Shuster, CEO of NMI, said. “The comments we’re making I’d characterize as relatively minor.”

‘Nuance Issues’

American International Group Inc.’s mortgage insurer, the largest by sales in the first half, has been working with Fannie Mae, Freddie Mac and FHFA and plans to discuss its remaining concerns in its comment letter, Donna DeMaio, the Greensboro, North Carolina-based unit’s CEO, said in an e-mail. The mortgage guaranty business accounted for less than 10 percent of AIG’s pretax operating profit from insurance in the second quarter.

There are a few areas where the companies’ comments will probably align, said Jack Micenko, an analyst at Susquehanna International Group. He cited opposition to a provision that excludes some premium payments from being counted as available assets until they are classified as earned for accounting purposes, which can take years.

KBW’s George said the companies will request that the amount of funds they have to hold against sets of loans decreases as the books age.

“It’s reasonable to assume that there will be some meeting of the minds on some of these nuance issues” between the companies and the regulators, Micenko said. “What they’re looking to do is, like everything else in the financial crisis coming out, is to put in place some rules and conditions to make it less painful the next time around.”

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Essent Group, the mortgage insurer backed by George Soros and Goldman Sachs, is beating older rivals in the stock market as the U.S. plans to tighten regulation of the industry.
Essent, Soros, Goldman Sachs, mortgage
Tuesday, 26 August 2014 11:14 AM
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