Thursday, March 10, 2011

Still a Bad Idea: Mortgage Insurance

Not to mention any names, but I was just taking a look at some of my old mortgage insurance company friends.

They have all bounced back in a big way and have >$1 billion market caps. They "insure" huge multiples (i.e. 25x-100x) of their capital in mortgages. Mortgages in California, mortgages in Florida, mortgages with LTV over 100%.

There are two ways to win on an insurance company short: bad underwriting and bad investing of the float.

Graham and Dodd knew that mortgage defaults were not an insurable risk so underwriting losses are baked in now that the housing market is rolling over for a second crash.

Their investment portfolios seem to be invested in shaky credits like states/municipalities and highly leveraged financial institutions.


Taylor Conant said...


What do you think about shorting the Canadian and Australian housing bubbles, cookie-cutter style?

CP said...


But I think we are going to get to dust off our "U.S. Crash Playbook - 2008" and run some of the same plays again.

E.g. the mortgage insurers.

This bears further research but I think a lot of companies have "doubled down" over the past two years and another deflationary episode will be a total wipeout.