Measuring the Incalculable; Valuing the Intangible!

Thanks to gfresh, giving me the inspiration or impetus for this post. I had been meaning to right about this for the last week now. But such is the life of a student with multiple assignments due. So what danger do Australian banks have with mortgage reinsurers?

Gfresh wrote on the 3^rd march:

Numberchruncher's post #27 in here is worth noting carefully, however I'll repeat it here. ANZ, Westpac, St George, and Bendigo have their own mortgage insurance business.. That is they back their own mortgages for that that have less than 20% deposit. And I assume somebody (worldwide?) backs these against risk.

It is quite complicated (and I'll admit no matter how much I read I cannot fully understand it myself), but I assume these mortgages are packaged into RMBS and traded on the world market. There they are probably ranked, leveraged, traded, and mixed with other mortgages from right across the world. Even this prospect is a little worrying right now with everything so fragile. Obviously, there are also ramifications to these institions in particular if there is any sort of trouble in our own realestate market. Maybe that's rubbish, who knows.

CBA, NAB, and others back their mortgages through PMI (NYSE:PMI) or Genworth (NYSE:GNW). Curious myself, pulling up a chart - PMI has gone from a SP of $50 to a price close to $7.00 in 8 months (-86%). Genworth is a little better, but still has lost 33%. What happens if PMI were to get into serious trouble? I do not even know if this is possible, likely or plain silly, but to be 14% of it's previous value has to make you wonder - and the likely consquences if it were to happen. I still can't see how this can't be exposure.

Now the banks say they have very little 'direct exposure' to subprime, but conversely are they saying they have a s.load of 'indirect exposure' ?

Firstly, the PMI chart looks shocking. GNW is not as bad. However, PMI has not recovered really at all since the last fed action. In fact, it is lower than just a few weeks ago, in the aforementioned post. It is now currently trading at $6.36 and is down 86% in the previous 52 weeks. GNW on the other hand is not fairing so badly. Comparatively, GNW has lost some 40% of its value in the last 12 months.

But the problems are by no means over. These are just two articles in relation to PMI:

PMI is a publicly owned investing holding firm, and through its subsidiaries, provides credit enhancement products designed to promote homeownership and facilitate mortgage transactions in the capital markets of several countries. The Complaint alleges that during the Class Period, PMI and certain of its officers and directors violated the federal securities laws by issuing materially false and misleading statements regarding PMI's business model and financial condition, which had the effect of artificially inflating the market price of the Company's common stock.

…

http://money.cnn.com/news/newsfeeds/articles/marketwire/0374283.htm

PMI Expects $236 Million Loss in U.S. Mortgage Units (Update2)

By Erik Holm and Andrew Frye

March 3 (Bloomberg) -- PMI Group Inc., the Walnut Creek, California-based insurer, said losses from U.S. mortgage insurance totaled about $236 million in the fourth quarter.

The losses compare with net income of $77.2 million in the year-earlier period, the company said today in a statement. PMI, the second-largest U.S. mortgage insurer, has delayed filing full-year earnings with regulators to await data from bond insurer FGIC Corp., which it owns with Blackstone Group LP.

Mortgage insurers, which reimburse lenders when borrowers don't pay, are scaling back coverage after a surge in claims pushed the top three companies into third-quarter losses. Defaults on privately insured U.S. mortgages advanced for the 13th straight month in January on an annual basis amid the worst housing slump in at least a quarter century.

``Everybody is kind of putting their finger in the air trying to tell how bad it's going to be,'' said Michael Grasher, an analyst at Piper Jaffray & Co. in Chicago. The loss at PMI's U.S. mortgage insurance units exceeded Grasher's estimate of $190 million.

PMI fell 49 cents, or 6.7 percent, to $6.78 at 4:30 p.m. in New York Stock Exchange composite trading. The company's shares have lost 85 percent in the past 12 months.

PMI posted its first quarterly loss as a publicly traded company in the three months ended Sept. 30 as it paid more to reimburse mortgage lenders for bad loans. PMI owns 42 percent of FGIC, spokeswoman Beth Haiken said. The FGIC stake reduced third-quarter earnings by $27 million.

PMI probably will report a ``significant'' fourth-quarter loss in connection with its stake in FGIC and PMI won't invest more capital in FGIC, the statement said.

MGIC Investment Corp., the biggest mortgage insurer, said Feb. 7 it will cut sales in regions with high foreclosures. Four days later, PMI said its domestic unit will stop writing new coverage for homebuyers who borrow more than 97 percent of their property's value.

To contact the reporters on this story: Erik Holm in New York at eholm2@bloomberg.net; Andrew Frye in New York at afrye@bloomberg.net

Last Updated: March 3, 2008 18:47 EST

It will be interesting to see how our banking stocks fare early next week when PMI releases its results. It had to be delayed due to auditing problems, so I expect trouble.

This is a newsbyte for GNW:

It looks as though GNW is heavily reliant on foreign property markets. So if, property markets like in Australia fall over, it could then create a problem for GNW, and in turn for Australian banks that have dealings with GNW.

What would be interesting to see is what banks have dealings with each firm, and which have underperformed the others. But are Australian banks in as much trouble as their US counterparts? I’d say in some cases, the answer would have to be yes.

Posted by Glen at 2:18 PM