Gazing at NovaStar's Insurance Setup
By Herb Greenberg
Senior Columnist
01/10/2003 02:11 PM EST
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Fried-day:
Subprime silliness: Earlier this week, after mentioning concerns about subprime mortgage lenders like NovaStar (NFI:NYSE - news - commentary - research - analysis) because of a rise in foreclosures, I received quite a few emails with this message: You dummy, NovaStar will be fine because most of its loans are backed by mortgage insurance.
Fair point, but there's no guarantee that insurance will be available in the future. NovaStar says as much in its boilerplate SEC disclosures, where it warns of a risk that "mortgage insurance providers will revise their guidelines to an extent where we will no longer be able to acquire coverage on all of our new production." The company adds, "The providers may also increase insurance premiums to a point where the cost of coverage outweighs its benefit."
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To be sure, the mortgage insurers have a business to run as well, and as subprime mortgage performance deteriorates, insurance rates are likely to rise and pinch the profits for lenders. As Peter Eavis reports Friday, MGIC Investment (MTG:NYSE - news - commentary - research - analysis) announced that the default rate on mortgages to people considered subprime borrowers rose to 12.68% in the fourth quarter from 11.68% a year earlier.
Just as interesting, however, is that MGIC also reported that insurance on bulk loans, or securitized portfolios, has fallen. In SEC filings for its securitized loan portfolios, NovaStar identifies MGIC as one of its insurers. MGIC says that most of its subprime loans are in bulk transactions. While subprime loans are less than half of all bulk transactions, the slide in bulk transactions at a time when the mortgage business has never been busier suggests that MGIC is being more selective.
That harkens back to NovaStar's boilerplate that there's no guarantee it can get the insurance it once did.
That's the thing about boilerplates: Every once in a while they turn into reality. |
