Can Saving PMI Also Save the Economy? Cramer Thinks So
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Wall Street has been gyrating as it considers the Bush Administration's proposed
economic stimulus plan and the Democrat controlled Congress's response to it.
The plan is largely based on tax cuts for businesses and small cash rebates
to individuals and families which Washington apparently hopes will be quickly
spent rather than saved or used to pay down debt.
What is clearly missing in the current proposals is any mention of the
terrible state of housing which started the current economic slide.
Even if it doesn't single-handedly cause any recession that develops, it will
certainly have been a major player.
There are a dozen places that the government could plug in and stimulate the
housing/lending industry. The NAR
recommended last week that the conventional lending limit imposed on Freddie
Mac and Fannie Mae be raised by some $200,000 and the FHA
reform bill which has been kicking around Congress for some time be quickly
passed.
The GSEs themselves (Fannie and Freddie) have asked that their portfolio limits
be raised temporarily so they might fund more loans and warehouse them until
the secondary market improves enough to absorb the surplus.
There have been suggestions from other quarters that the government agree to
guarantee some types of loans to aid in loosening up credit, but none of these
suggestions seemed to have gained much traction with the Administration although
members of Congress have endorsed a few of them. There seems to be a refusal
on the part of the administration to "reward" borrowers and lenders for irresponsible
behavior, no matter what the larger cost may be to the economy.
One of the more creative ideas for economic stimulus came late last week from
Jim (Mad Money) Cramer who laid out his "Game Plan for Saving
the U.S. Economy." His basic premise is that, with banks already taking such
a beating because of their investments in sub-prime mortgages, if the insurers
who backed these loans fail, there will be no bottom for bank stocks and thus
the entire system would collapse. Therefore, Cramer concludes, the government
needs to buy these private insurers.
He is talking about the companies such as MGIC and PMI which write the private
insurance on residential mortgages with less than 80 percent loan to value and
companies like Ambac that guarantee bonds, particularly municipal bonds. Cramer
proposes that the insurance policies covering municipal bonds could be sold
to Warren Buffett or the highest bidder while Washington would guarantee the
insurance on loans at $.50 on the dollar. At most, even if every insured loan,
some $500 billion worth, defaulted, the economy could be saved for a mere $250
billion. And, he added, most likely no more than half of the $500 billion would
need to be covered.
Following this course of action the Mad Money Man says, would give the economy
the certainty it needs. The banks that have been hard hit by sub-prime loses
such as Citigroup, Countrywide Financial, and Merrill Lynch could measure their
losses, build up their reserves and get back to the business of lending.
Add a one point Federal interest rate cut above and beyond this plan and Cramer
says the Dow would add 2,000 points in two weeks. Failure to follow the plan
might lead to "the end of the world - or at least another 2,000 point decline
in the market."
Scary scenario, but is he totally out in left field?
In a November Associated Press article credited to WJLA television, leading
PMI insurer MGIC Investment Corporation admitted that they won't turn
a profit again until 2009. The company has issued $196.6 billion in policies
against individual home mortgages and by November 2007 had paid out $586 million
in claims and expected to have a total payout of $875 million by the end of
the year.
Industry wide there was a total of $776 billion in private mortgage insurance
in force as of last September. The industry trade group, Mortgage Insurance
Companies of America said that about 10 percent of the total mortgage loan market
is subject to PMI. It felt, at that point that its members would face claims
of between $1.2 billion and $1.5 billion in 2008, about twice the claims in
2006.
Another major insurer, PMI Group, saw its quarterly claims (apparently third
quarter) rise 49 percent to $92.6 million and Radian Group lost $703.9 million
in the same time period after write-downs and losses from subprime mortgages
suffered through a joint venture with MGIC.
By the end of the year things were looking even dicier. Mark Anderson reporting
in the Sacramento Business Journal on New Year's Eve stated that the default
rate on privately insured mortgages rose in November to the highest
level since the Mortgage Insurance Companies began keeping records. The industry
trade group reported that 61,300 insured borrowers were at least 60 days late
on payments by the end of that month, 35.2 percent more than were delinquent
one year earlier and the first time the number had topped 60,000 since record-keeping
began in 2001.
None of this means that the PMI insurers are about to go under. Some carry
heavy cash reserves and groups such as the Mortgage Bankers Association seem
to feel that the safety net is secure. We are just saying...
And those bond insurers such as Ambac are also facing problems. Ambac lost
an AAA credit rating from Fitch last week and both Ambac and MBIA are facing
additional review of their credit ratings by Moody's and Standard &
Poor's. Each of the insurers have announced their intention to raise capital
to keep or reinstate their AAA ratings but Ambac Friday ditched a proposed equity
and equity-linked sale through which it had hoped to raise $1 billion.
Back to our original premise and one with which we think Cramer, and NAR, and
maybe even Wall Street might agree. The President and Treasury Secretary Paulson
should ditch the idea of giving away $800 lollipops to consumers and look at
some of the underlying problems in the housing and credit markets.
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