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Saturday, March 26, 2011

Mortgage Insurers Hit a Wall

We have examined, on a few different occasions, the possibility of a recovery for mortgage bond insurers including MBIA (MBI), MGIC (MTG), and PMI (PMI). At one point, back in July, I recommended MGIC as being among the "best" of what was admittedly a shoddy group with MBIA on its heels. The rest I wasn't so sure of to put it mildly. As it turns out, MBIA and MGIC have been the better performers, in that order, but the sector in general has lagged the market. You didn't get killed by playing either of these, but you did underperform an impressive recovery in the broad market.

This is a little surprising at first blush because it would appear that the sector's fundamentals are improving. However, the simple fact is that the stocks had already priced in simple survival and were already looking ahead to meaningful improvement in earnings and balance sheets to justify more than just a dead cat bounce. Though reports have been encouraging with respect to survival, neither MBIA nor MGIC have shown much indication of sustained growth that would propel the stock prices beyond where they are right now. The fact that there is no sustained recovery in housing in the future to improve originations and that a renewed price decline may increase defaults seems to be what keeps these stocks under wraps.

Perhaps the proper analogy for these stocks can be found in the home builders like Toll Brothers (TOL) and D.R. Horton (DHI) that cratered early on, recovered a little bit, and have now stayed there, forever hampered by the nasty overhang of the housing bubble. I think, in both cases, that a recovery from "death" pricing to "survival" pricing may be all that you get for a while.

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