Hedge funds led by Paulson & Co. and Maverick Capital are piling into mortgage insurers in a bet that some of the companies worst hit by the U.S. housing crash will be among the biggest winners in the rebound.
Maverick, run by Lee Ainslie, added 23.6 million shares of MGIC Investment Corp. in the first quarter as the stock almost doubled, according to regulatory filings. Billionaire John Paulson’s $18 billion hedge-fund firm acquired 17 million shares of MGIC and 8 million of rival Radian Group Inc.
Perry Capital, George Soros’s family office, and Blue Ridge Capital LLC also added stakes as some of the world’s largest hedge funds wager that companies seen as recently as last year to be on the verge of default, and whose debt is still junk- rated, will benefit from rising home prices and the government’s retreat from insuring home loans. Operating income before taxes for the industry more than doubled in the first quarter from the prior year, according to Moody’s Investors Service, as loan delinquencies declined to the lowest since 2008.
“The mortgage insurance sector is a very good business right now,” said Bose George, an analyst at Keefe Bruyette & Woods in New York. “You’re getting returns in the high teens on new capital and there are barriers to entry.”
Mortgage insurers cover losses when homeowners default and foreclosures fail to recoup costs. The coverage is typically required when homeowners make a down payment of less than 20 percent. Firms such as Philadelphia-based Radian and MGIC, in Milwaukee, received waivers from regulators to continue selling coverage after the housing bubble burst in 2007 and millions of homeowners defaulted. Losses pushed PMI Group Inc., Triad Guaranty Inc. and Old Republic International Corp. from the market.
Survivors Thrive
The survivors are now attracting capital as the housing market rebounds from the worst plunge in eight decades. Home prices jumped 10.5 percent in March from a year earlier, the fastest pace in seven years, according to CoreLogic Inc. Home sales probably rose in April to the highest level in more than three years, according to the median forecast of economists surveyed by Bloomberg ahead of figures from the National Association of Realtors and the Commerce Department. The proportion of home loans at least 90 days late or in foreclosure was 6.39 percent as of March 31, the lowest since the end of 2008, according to Mortgage Bankers Association data.
MGIC rose 86 percent in the first quarter after losing 29 percent in 2012. Radian surged 75 percent, and nearly tripled last year. The companies’ prospects were bolstered when they sold shares and debt in the first quarter to replenish capital that was drained amid the financial crisis, said George.
Recovery Exposure
“People are looking for names that are still very exposed to improvements in home prices and improvements in mortgage credit over the next few years,” he said. “If you believe in a very strong recovery, the insurers remain the best way” to invest.