Can Saving PMI Also Save the Economy? Cramer Thinks So

Wall Street has been gyrating as it considers the Bush Administration's proposed economic stimulus plan and the Democrat controlled Congress's response to it. The plan is largely based on tax cuts for businesses and small cash rebates to individuals and families which Washington apparently hopes will be quickly spent rather than saved or used to pay down debt.

What is clearly missing in the current proposals is any mention of the terrible state of housing which started the current economic slide. Even if it doesn't single-handedly cause any recession that develops, it will certainly have been a major player.

There are a dozen places that the government could plug in and stimulate the housing/lending industry. The NAR recommended last week that the conventional lending limit imposed on Freddie Mac and Fannie Mae be raised by some $200,000 and the FHA reform bill which has been kicking around Congress for some time be quickly passed.

The GSEs themselves (Fannie and Freddie) have asked that their portfolio limits be raised temporarily so they might fund more loans and warehouse them until the secondary market improves enough to absorb the surplus.

There have been suggestions from other quarters that the government agree to guarantee some types of loans to aid in loosening up credit, but none of these suggestions seemed to have gained much traction with the Administration although members of Congress have endorsed a few of them. There seems to be a refusal on the part of the administration to "reward" borrowers and lenders for irresponsible behavior, no matter what the larger cost may be to the economy.

One of the more creative ideas for economic stimulus came late last week from Jim (Mad Money) Cramer who laid out his "Game Plan for Saving the U.S. Economy." His basic premise is that, with banks already taking such a beating because of their investments in sub-prime mortgages, if the insurers who backed these loans fail, there will be no bottom for bank stocks and thus the entire system would collapse. Therefore, Cramer concludes, the government needs to buy these private insurers.

He is talking about the companies such as MGIC and PMI which write the private insurance on residential mortgages with less than 80 percent loan to value and companies like Ambac that guarantee bonds, particularly municipal bonds. Cramer proposes that the insurance policies covering municipal bonds could be sold to Warren Buffett or the highest bidder while Washington would guarantee the insurance on loans at $.50 on the dollar. At most, even if every insured loan, some $500 billion worth, defaulted, the economy could be saved for a mere $250 billion. And, he added, most likely no more than half of the $500 billion would need to be covered.

Following this course of action the Mad Money Man says, would give the economy the certainty it needs. The banks that have been hard hit by sub-prime loses such as Citigroup, Countrywide Financial, and Merrill Lynch could measure their losses, build up their reserves and get back to the business of lending. Add a one point Federal interest rate cut above and beyond this plan and Cramer says the Dow would add 2,000 points in two weeks. Failure to follow the plan might lead to "the end of the world - or at least another 2,000 point decline in the market."

Scary scenario, but is he totally out in left field?

In a November Associated Press article credited to WJLA television, leading PMI insurer MGIC Investment Corporation admitted that they won't turn a profit again until 2009. The company has issued $196.6 billion in policies against individual home mortgages and by November 2007 had paid out $586 million in claims and expected to have a total payout of $875 million by the end of the year.

Industry wide there was a total of $776 billion in private mortgage insurance in force as of last September. The industry trade group, Mortgage Insurance Companies of America said that about 10 percent of the total mortgage loan market is subject to PMI. It felt, at that point that its members would face claims of between $1.2 billion and $1.5 billion in 2008, about twice the claims in 2006.

Another major insurer, PMI Group, saw its quarterly claims (apparently third quarter) rise 49 percent to $92.6 million and Radian Group lost $703.9 million in the same time period after write-downs and losses from subprime mortgages suffered through a joint venture with MGIC.

By the end of the year things were looking even dicier. Mark Anderson reporting in the Sacramento Business Journal on New Year's Eve stated that the default rate on privately insured mortgages rose in November to the highest level since the Mortgage Insurance Companies began keeping records. The industry trade group reported that 61,300 insured borrowers were at least 60 days late on payments by the end of that month, 35.2 percent more than were delinquent one year earlier and the first time the number had topped 60,000 since record-keeping began in 2001.

None of this means that the PMI insurers are about to go under. Some carry heavy cash reserves and groups such as the Mortgage Bankers Association seem to feel that the safety net is secure. We are just saying...

And those bond insurers such as Ambac are also facing problems. Ambac lost an AAA credit rating from Fitch last week and both Ambac and MBIA are facing additional review of their credit ratings by Moody's and Standard & Poor's. Each of the insurers have announced their intention to raise capital to keep or reinstate their AAA ratings but Ambac Friday ditched a proposed equity and equity-linked sale through which it had hoped to raise $1 billion.

Back to our original premise and one with which we think Cramer, and NAR, and maybe even Wall Street might agree. The President and Treasury Secretary Paulson should ditch the idea of giving away $800 lollipops to consumers and look at some of the underlying problems in the housing and credit markets.