MGIC Downgraded by Fitch

In yet another sign of dwindling confidence about MGIC Corp.'s (MTG - Analyst Report) business prospects, Fitch has downgraded the insurer financial strength (IFS) rating of Mortgage Guaranty Insurance Corp. to 'BBB-' from 'BBB' and placed it and the long-term debt and senior debt ratings of MGIC Investment Corp. on Rating Watch Negative.

In March, 2009, Fitch Ratings had downgraded MGIC’s long-term issuer and senior debt to 'B' from 'BBB-' and junior subordinated debt rating to 'C' from 'BB' previously.

On Thursday before the opening bell, MGIC reported a loss of $2.74 per share for the second quarter of 2009. Following the results, management announced a reorganization of its core mortgage insurance business by capitalizing MGIC Indemnity Corp with $1 billion. The capitalization will be funded from existing cash and investments.

We doubt management's assertion that it has sufficient resources to settle the claims. Therefore we maintain a sell recommendation for MGIC.

Ever since the end of the housing market boom in 2006, MGIC, the largest private mortgage insurer has been facing difficult business conditions as borne out by its results. Mounting mortgage delinquencies have made matters difficult for the mortgage insurer, which has been reporting losses since the second half of 2007.

Other private mortgage insurers who have suffered rating downgrades since the housing downturn include United Guaranty Residential Insurance (UGRIC), Radian Guaranty (Radian MI), PMI Mortgage Insurance (PMI - Analyst Report). Private Mortgage Insurers mostly help banks and other lenders recover their costs in the event of a homeowner defaulting on home loan payments.

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