Big Losses for PMI Company and HR Block Unloads Option One
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By mid-morning the stock market was bucking up strongly behind the news of the
stunning sale of Bear Stearns at $2 a share. However, there was still bad news
out there.
PMI Group, one of the largest private mortgage insurance companies,
reported a record loss of $1.01 billion or $12.51 a share for the fourth quarter
of 2007 compared with net income of $100.5 million or $1.19 a share in the fourth
quarter of 2006. According to Reuters, analysts had been anticipating a loss
of $3.37 per share.
The company also announced it would slash its dividend 76 percent to $1.25
per share.
The losses were tied both to the growing rate of foreclosures which cost PMI
negative income of $236 million in its U.S. mortgage insurance operations and
$776.1 million in after-taxes losses due to the company's stake in Financial
Guaranty Insurance Company (FGIC).
Net premiums rose 12 percent to $263.5 million which reflected an increase in
new insurance written in the U.S. along with other factors.
PMI holds a 42 percent state in FGIC, the fourth largest bond insurer
which has a profitable business segment insuring municipal bonds but has a very
troubled subprime credit-default-swap business for which it has been trying
to raise $1 billion in capital to cushion against losses on these complex securities
that have lost significant value.
PMI's core business is private mortgage insurance in which it covers potential
lender losses on loans where borrowers put down less than a 20 percent down
payment. This sector of the mortgage industry is being hard hit as it pays claims
for bank losses through foreclosure. PMI said it expects to pay mortgage insurance
claims for its U.S. operations in an amount between $825 million to $975 million
this year.
Mortgage insurers such as PMI cover potential lender losses on loans to borrowers
who can't come up with a 20% down payment. The PMI companies have seen claims
skyrocket over the last year as the lack of liquidity in the housing market
makes it difficult for borrowers to refinance or for lenders to resell foreclosed
properties at profitable prices, forcing mortgage insurers to pay up.
In other mortgage news, Option One Mortgage Corporation, a
division of H&R Block, has been sold to Wilbur Ross for an estimated $1
billion.
Ross is known as a distressed asset investor who has, in recent months, agreed
to acquire $42 billion in mortgage servicing rights from American Home Mortgage
Investment Corporation and made a $1 billion investment in Bermuda bond insurer
Assured Guaranty.
Option One, the fourth largest mortgage servicer in the nation, services about
$53 billion of subprime mortgages. These assets, combined with the American
Home Mortgage Investment acquisition will give Ross the second largest subprime
servicing portfolio in the nation after Countrywide Financial.
Option One was among the first of the subprime participants to admit problems
with its portfolio and ultimately generated million of dollars in losses. At
the time its troubles became public it had agreed to be acquired by Cerberus
Capital Management but both sides agreed to terminate their deal as conditions
continued to deteriorate. H&R Block had announced in December that it was
shutting down Option One.
The Option One/Ross deal is expected to close by May 30 and the sales proceeds
will primarily be used to pay off some $700 million in Option One debt.
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