Based in Milwaukee, Wisconsin, MGIC Investment Corporation (MTG) is the largest private mortgage insurer in the U.S., offering private mortgage insurance across the country, the District of Columbia, and in Puerto Rico through its subsidiary, Mortgage Guaranty Insurance Corporation. MGIC Investment Corporation primarily covers single-family, first-time mortgage loans by providing primary insurance to cushion lenders against non-payment on individual loans and expand home ownership opportunities by enabling people to purchase homes with smaller down payments. MGIC Investment also offers pool insurance (coverage over and above primary coverage) in the secondary mortgage market on low down payment loans, mainly to Fannie Mae and Freddie Mac (Government Sponsored Enterprises). Through its other operating subsidiaries, the company provides ancillary financial services such as contract underwriting, portfolio retention, mortgage loan origination, and fulfillment services. In 2006, premiums earned accounted for 80.8% of the company's $1.47 billion revenue. Investment income and other sources and gains accounted for the remaining 16.4% and 3.1% of revenue, respectively, with realized investment curtailing total revenues by 0.3% for the year.
Our main concern going forward for MGIC is the impact that mortgage insurance (MI) avoidance products, known as piggyback loans, will have on insurance in force growth. Lenders have been offering a second mortgage as an alternative to mortgage insurance for purchasers with a down-payment of less than 20% of the value of the property. The first mortgage is the 80% LTV required to avoid mortgage insurance. The second mortgage is a 10% LTV and is used by the borrower to pay the balance of the 20% down payment on the first mortgage, which the borrower did not initially have. Because these products are attractive to banks and lenders (they receive two loan origination fees), and borrowers (interest on the second mortgage is tax deductible mortgage insurance premiums are not) we believe piggyback loans and other mortgage insurance avoidance products will continue to gain popularity and erode the market share of traditional mortgage insurance. While MTG management has stated that about 30-40% of the industry's business has been lost to these alternatives, this company as well as other mortgage insurers has retaliated by releasing new products and coaxing the congress for the tax deductibility of mortgage insurance premiums. Though positive, we still think it may take some time to stem the outflow of business to MI avoidance products.(Read more at Wikinvest )