Freddie Mac Made $11 Billion - How About the Private Mortgage Insureres?

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Freddie Mac, the government-run mortgage finance provider, recently reported an annual profit of $11 billion.  Freddie attributed the earnings to an increase in home values and a drop in delinquencies.  This great news provides additional data regarding the housing market's continued recovery.

The fact that Freddie attributed the gains to a drop in delinquencies piqued my interest in relation to the private mortgage insurers -- particularly that sector's two pure plays, MGIC Investment (NYSE: MTG) and Radian Group (NYSE: RDN).

Before going into details on these companies, these are small, speculative, and volatile stocks.  So investors who aren’t comfortable with these pure-plays should look at other companies who do this type of insurance as part of a broader portfolio.  For instance, AIG (NYSE: AIG) does mortgage insurance as part of their portfolio of insurance products.  Larger companies like AIG will benefit from the same trends as the mortgage insurers, but to a lesser degree.

MGIC recently reported ugly earnings, with a quarterly loss of $1.91 per share and a full-year loss of $4.59 per share.  Those numbers look even worse when you consider the stock price is around $3.25.  Those earnings did include a one-time charge of roughly $1.84 per share.  The company has reported losses for the past six calendar years.  The company has a book value of $0.97 per share.  On that news, the stock rallied over 20% and has continued to rally since then.  Also, the company just annoucned a secondary offering.

On the positive side, the company did report a 70% increase in total polices written and that delinquencies dropped 21% year over year.  Also, the total percentage of delinquent loans was 11.87%.

Meanwhile, Radian Group has gotten significant publicity in the month of February, rising from just over $6 at the beginning of the month to just over $9 at the end of the month, and topping $10 this month.  The company also announced a secondary offering at the end of last month, priced at $8 per share.  Since the pricing of the secondary was announced, the stock rallied above $9 per share.  That shows strong demand for Radian's shares.  The fact that the stock wasn’t hit with selling pressure from people flipping the stock who bought during the secondary is very positive. 

When Radian last reported earnings, they reported losses of $1.34 per share.  Radian does have less leverage than MGIC.  Book value was reported at $5.51.  The company’s loans had a delinquency rate of 12.1%.

Clearly, investors in these companies aren’t investing for their current performance, but for how they expect the companies to perform in the future.  As mentioned in this older article, Freddie Mac has been increasing the premiums it charges to borrowers.  This has allowed the private companies to also raise prices.  As Freddie and Fannie are wound down, private mortgage insurers will increase their market share to make up for the shrinking role the government-backed entities play.

After researching these companies, both MGIC and Radian stand to benefit greatly from any improvements in the housing market and delinquency rates amongst mortgage holders.  But due to the volatility and risk associated with these two investments, they are only for investors looking for a speculative way to gain exposure to an improving housing market.  Also, both companies have seen significant rallies recently.  The fundamentals seem to be positive for the companies, but both companies look like they have rallied more than enough to reflect the current environment.

ahokiealum owns shares of AIG. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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