Mortgage Insurer PMI's Bankruptcy Will Make It Harder To Obtain Loans

One of the nation's major mortgage insurers filed for Chapter 11 bankruptcy protection Wednesday -- a move that's seen as a blow to lenders and ultimately to borrowers who seek home loans.

Insurance giant PMI Group Inc. took the bankruptcy step after an Arizona judge rejected its efforts to overturn the state seizure of its mortgage insurance unit last month.

Robert Satnick, past president of the California Mortgage Bankers Association, called the Chapter 11 filing "another nail in the coffin" of the mortgage lending industry. PMI provided insurance to lenders who needed coverage in the event borrowers defaulted. Insurance is required on a mortgage loan if the buyer has less than 20 percent equity invested in the property. Lenders purchase the insurance, and borrowers pay for it.

The housing bust was not kind to mortgage insurers, and PMI saw its business deteriorate as defaults rose. In the mean time, increasing numbers of buyers have turned to the Federal Housing Administration, whose loans only require 3.5 percent down from home buyers. The agency has seen its share of the market rise since 2008.

Now PMI's bankruptcy filing reduces the number of choices that lenders have to obtain mortgage insurance, without which they are unlikely to fund loans to borrowers. Satnick says all eyes will be watching to see if the remaining large mortgage insurers, including MGIC and Genworth Financial, remain viable in this economic climate.

The Walnut Creek, Calif.-based PMI Group sought protection from its creditors in the U.S. Bankruptcy Court in Wilmington, Del. According to the Wall Street Journal, it listed assets of $225 million and debts of more than $736 million.

The company had hoped to use a subsidiary of PMI Mortgage Insurance Co., the unit seized by Arizona regulators, to write new mortgage insurance nationwide. That plan hit a roadblock when the Arizona Department of Insurance seized control of the mortgage insurance unit in October. According to the Journal, PMI chief executive L. Stephen Smith said in court papers that PMI employees have been "locked out of their offices, unable to access the Debtor's financial information and documents, and unable to access their electronic mail" since Oct. 21.

On Tuesday, Judge Richard Gama of Arizona's Superior Court ruled in favor of state regulators and called PMI's mortgage subsidiary "currently insolvent." Gama said that financial forecasts of the company's health couldn't be relied on because its "loss projections have been off by at least 35% every year for the past three years."

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