PMI Group Inc., a leading provider of insurance to mortgage lenders, has retained three restructuring and bankruptcy consultants in the aftermath of last week’s seizure by Arizona regulators of PMI’s subsidiary PMI Mortgage Insurance.
Documents filed with the U.S. Securities & Exchange Commission last week disclosed that PMI, based in Walnut Creek, Calif., had hired Evercore Partners, a New York-based investment banking advisory firm. PMI has also retained the law firms Sullivan & Cromwell and Young Conaway Stargatt & Taylor.
PMI has reported losses for the last 16 quarters, including a net loss of $329 million in the quarter ended June 30. The Wall Street Journal reports that the company’s mortgage-insurance unit had been paying about $1.5 billion annually in claims to reimburse lenders and mortgage investors such as Fannie Mae, Freddie Mac, and Wells Fargo for losses when homeowners default.
Those payouts had drained the capital of PMI Mortgage Insurance, which on October 21 was taken over by the Arizona Department of Insurance for lack of funds. Under court order, the department possesses and controls the subsidiary. Insurance regulators in that state mandated on Monday that PMI Mortgage Insurance pay claims at 50 cents on the dollar. On August 19, regulators told PMI Mortgage Insurance to stop writing new policies and to stop making interest payments on a $285 million loan.
The company has stated that the actions by Arizona regulators could push three of its loans—valued at $250 million, $150 million, and $285 million—into default, according to documents filed with the SEC and news reports. "[PMI Group] does not have the financial resources to repurchase the outstanding principle amount of the 4.50% notes if it were required to do so," the company stated in its filing.
PMI disclosed the resignations of several of PMI Group’s officers, including its general counsel, chief accounting officer, and corporate controller. Its CEO, CFO, and chief risk manager reportedly were placed on leave, according to news reports. However, these officers retain their positions with PMI Mortgage Insurance. (David Berson, the former chief economist for Fannie Mae who holds the same position with PMI Group, declined comment.)
Mortgage insurers such as PMI play an important role in keeping the nation’s secondary mortgage-lending apparatus greased. Banks are usually required to take out insurance on mortgages when home buyers borrow more than 80% of the home’s assessed value, which are loans that Fannie Mae and Freddie Mac aren’t underwriting these days. Mortgage insurers reimburse lenders when homeowners default.
The country’s economic downturn and housing market collapse have exposed mortgage insurers to far greater risk. The Los Angeles Times reports that since 2007 PMI has reported more than $3.5 million in losses on claims paid out on foreclosed homes. And what concerns industry observers is that PMI isn’t the only lender having financial problems. Quarterly losses reported by MGIC Investment Corp., the nation’s largest mortgage insurer, have exceeded analysts’ expectations, according to Bloomberg News. And the CEO of another leading mortgage insurer, Radian Group, S.A. Ibrahim, called for lenders and insurers to work together to prevent more PMI-like disruptions. He implied that a “lack of flexibility” by Fannie Mae and Freddie Mac, its two biggest customers, drove PMI down.
John Caulfield is senior editor for Builder magazine.