Radian Group Inc (NYSE:RDN) Rally After Relaxation In Capital Requirements

MGIC Investment Corp. (NYSE:MTG) and Radian Group Inc (NYSE:RDN) posted strong gains after a U.S. regulator eased mortgage insurers’ requirements on some loans. The Federal Housing Finance Agency released rules that softened capital requirements on some loans valid from 2005 through 2008.

Read why analyst may see a swing in the momentum for RDN.

The relaxations are in comparison with measures proposed by the regulator in July. The mortgage insurers were troubled by guarantees issued in the mentioned years as the housing prices declined soon after. The new set of rules provides relief on loans compared to that period in those cases where borrowers constantly met their commitments. It comes as a big win for Radian and MGIC Investment.

The standards

Mortgage insurers’ primary role is to cover losses when homeowners default. The government owned mortgage investment companies Fannie Mae and Freddie Mac that are overseen by the FHFA need insurance when homeowners deposit down-payments below 20%. The new standards are planned to make sure there is no repeat of what occurred after the financial crisis.

There was a deep plunge in home prices and pushed almost half of the industry into deep problem. The mortgage investment companies including Freddie Mac and Fannie Mae were saddled with losses when mortgage insurers failed to honor their obligations. The insurers that commenced selling coverage after the depth of the crisis recorded modest moves. MGIC and Radian were among the top gainers.

The shortfall

Radian sold a unit in April for almost $800 million. It can comply with the new eased capital rules immediately by utilizing approximately $330 million in liquid assets. The standards are effective December 31, and MGIC stated it will likely be in compliance by then. The company faced a capital shortfall of close to $230 million as of March 31, 2015. Genworth Financial Inc (NYSE:GNW) had a capital shortfall of as much as $700 million and intends to fulfill the standards by December.

Erica

Erica

Erica is a graduate of New York University’s school of Journalism. She joined US Markets Daily as a general assignment reporter in January of 2008.