Turnarounds in the mortgage market

Speculators can play a rebound in housing via these stocks.

By TheStockAdvisors Mar 4, 2013 11:29AM
Arrow Up Photodisc SuperStockBy George Putnam, The Turnaround Letter

One interesting way to play a rebound in the housing market is through the mortgage insurance stocks. These companies provide insurance against defaults by borrowers who take out mortgages to buy homes.

When defaults and foreclosures skyrocketed, beginning around 2006, these companies suffered huge losses and some of them went out of business. The surviving mortgage insurers have been much more conservative since 2008, with the result that the new business they are writing is very profitable.

The problem, however, is that they are still trying to get out from under the poor risks that they took on prior to the meltdown in 2008. Rising home prices help the insurers get out from under these legacy problems.

As home prices begin to recover, fewer homeowners are likely to default because they can now hope to rebuild their equity in their homes. In addition, the losses on defaulted mortgages should be smaller as the homes fetch higher prices in foreclosure sales.

MGIC Investment (MTG) and Radian (RDN) are the two purest plays in this sector. Both still have risks from their legacy business, especially MGIC, which could have problems with regulators if results do not improve.

As is often the case, the stocks with the highest risks also have the highest return potential. Either stock, particularly MGIC, could end up worthless or could be worth several times its current trading level.

Mortgage insurance only represents about 22% of revenues at Genworth Financial (GNW), with the balance coming from other types of insurance and wealth management services.

Even so, the mortgage insurance has been a substantial drag on Genworth's performance, and it could turn into a positive force when the sector really turns.

Old Republic (ORI) has been trying to get out of the mortgage insurance business to focus more on its other types of insurance. Nonetheless, a rebound in the mortgage sector should help Old Republic's stock price.

Also, the company has a title insurance business and other lines that would benefit from a more active housing market.

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