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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Ramsey Su who wrote (5804)	1/23/2004 10:55:53 AM
From: ild	Read Replies (1) \| Respond to of 110194

Surprisingly SmithBarney analyst sees the same RDN problems as I see: IMPACT OF LOWER CREDIT QUALITY Unlike at its peer, the deterioration in Radian’s MI credit quality accelerated in 4Q03. The default rate increased 43 bps in the quarter to 4.72% from 4.29% in 3Q03. According to our calculations, the company paid $86 mil in claims, which is 4% higher than the $83 mil paid in 3Q03 and 50% higher than the $58 mil claims paid a year ago. By comparison, MGIC’s claims paid were flat sequentially in 4Q03 and its default rate increased just 16 bps sequentially to 5.57%. Due to the lower credit quality, we believe management will build reserves more aggressively in 2004. We now expect the company to increase loss reserves by $124 million (was $50 mil) to $914 million (was $831 mil) by year end. In 2005, we now expect reserves to increase by $55 million (was $41 mil) to $967 million (was $873 mil) by year end Also, Radian’s MI unit has been building a niche in the Alt-A rated business. We note that relative concentration of delinquencies in the Alt-A loans has increased over the past two years. At the end of December, Alt-A delinquencies represented 17.5% of total delinquencies, which is up from 15% in 3Q03 and 14.8% a year ago. Certainly we expect a normal ramp in delinquencies as the portfolio seasons. But we also think that a driver behind this trend is the easing underwriting standards used by lenders over the past two years. Previous underwriting standards required Alt-A borrowers to have minimum FICO scores of 660. Due to the increase in Alt-A volume, lenders moderated their underwriting to include borrowers with FICO scores between 625 and 660. We think this is contributing to the current increase in delinquency rates. While management has set strict limits on underwriting standards that Radian will accept and has raised premium rates on Alt-A loans, we believe that as these loan season, delinquencies will continue to increase. Also, an implication of the stricter standards may be lower Alt-A volume going forward.