Wednesday, September 10, 2008

Mortgage insurers and the bailout

One investor I respect was terribly surprised that the mortgage insurers fell on the Frannie bailout.

In my “Do you believe in magic post” I suggested that the mortgage insurers continue to write business only because of the continued goodwill of the GSEs. And the GSEs only do that because they hope the premiums on new business will allow the mortgage insurers to run ahead of the losses on the old business.

There has been a change of control of the GSEs. And the new management have no incentive to hide the losses of the old management by feeding premium to potential insolvent mortgage insurers.

I have no idea what the conservators will do to the mortgage insurers. But the change in management of the GSEs is unlikely to be positive though it may be neutral.

John Hempton

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