MGIC Plan to Keep Selling Coverage at Risk

A plan by MGIC Investment Corp. (MTG) to continue selling mortgage insurance appears to be in jeopardy, amid a tug-of-war between its primary regulator and Freddie Mac (FMCC), one of its major customers.

MGIC, plagued by billions of dollars in losses over the last five years, had hoped to keep selling coverage in several key states under a complicated plan that involved a new subsidiary. But the company warned Wednesday that insurance regulators in Wisconsin had objected to a provision in an agreement with Freddie Mac that was essential to pulling off the plan.

The disclosure, buried in MGIC's so-called "risk factors" that were included at the end of its second-quarter earnings, sent shares of the mortgage insurer tumbling 57% to $1.06.

At issue, at least in part, was a demand by Freddie Mac that the capital in the new subsidiary be available to pay claims on policies sold by the existing one. The Wisconsin insurance department, though, said the requirement doesn't recognize the regulator's "authority and obligations."

MGIC has approval from Fannie Mae to sell coverage without that condition, but it warned "lenders may not know which GSE will purchase their loans until loan origination is complete," which could mean "lenders may be unwilling to procure mortgage insurance" from the new subsidiary in the states where it operates.

"Furthermore," the company warned, "if we are unable to write business on a nationwide basis utilizing a combination of MGIC and MIC, lenders may be unwilling to procure insurance from us anywhere."

Representatives for MGIC and Freddie Mac had no immediate comment.

-Andrew R. Johnson contributed to this article.

Write to Erik Holm at [e-mail]

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