Bloomberg News

PMI Group Seeks Bankruptcy After Regulators Take Over Main Unit

November 28, 2011

Nov. 24 (Bloomberg) -- PMI Group Inc. filed for bankruptcy protection after the mortgage insurer lost a court bid to undo the takeover by Arizona regulators of PMI Mortgage Insurance Co. (MIC), its main unit.

The company based in Walnut Creek, California, listed assets of $225 million and debt of $736 million as of Aug. 4 in a Chapter 11 petition filed yesterday in U.S. Bankruptcy Court in Wilmington, Delaware.

Arizona Director of Insurance Christina Urias took control of the PMI unit last month on an interim basis and directed claims to be paid at 50 cents on the dollar after losses on mortgage defaults drained capital.

The Arizona regulator’s “action in seeking receivership of MIC, among other things, has led the debtor to seek bankruptcy protection in order to maximize value for its estate and creditors,” L. Stephen Smith, PMI’s chief executive officer, said in court papers.

The Arizona Department of Insurance previously told PMI to halt sales of new policies and stop making interest payments on $285 million in surplus notes, the company said in August.

PMI pays lenders after a homeowner defaults and a foreclosure fails to recover enough to cover the mortgage. The company is losing money amid the worst slump in U.S. housing prices since the Great Depression. Home prices have plunged 31 percent since their peak in 2006, according to the S&P/Case- Shiller index of property values in 20 cities.

‘Anticipated Demands’

The Arizona Department of Insurance sufficiently established that the insurer was so unsound that it “is or will become unable to meet the anticipated demands of its policyholders,” Arizona Superior Court Judge Richard Gama in Phoenix wrote in a five-page ruling, a copy of which was provided to Bloomberg News.

PMI, founded in 1972, provides residential mortgage insurance through its main operating unit, MIC. Lenders require mortgage insurance for most homebuyers who have less than a 20 percent down payment.

Under the Homeowners Protection Act (HPA) of 1998, consumers have the right to request cancellation of PMI policies when they pay down the mortgage to the point that it equals 80 percent of the original purchase price or the appraised value of their home when the loan was obtained, whichever is less, according to the Federal Reserve Bank of San Francisco Web site.

Cyclical Business

“Mortgage insurance companies like PMI are more susceptible to the cyclical nature of the economy in general, the housing and labor markets in particular, than many other types of insurance companies,” Smith said in court papers.

Other mortgage insurers have faced financial difficulties because of the housing collapse. PMI has posted 16 straight quarterly losses.

Triad Guaranty Inc. stopped selling policies when capital ran short in July 2008, and was ordered by a state regulator to defer 40 percent of claims payments because of “uncertainty” over whether it will meet its obligations.

Fannie Mae, the government-controlled mortgage finance company, suspended a unit of Old Republic International Corp. as an approved guarantor of home loans in July after it failed to meet capital standards.

Credit-default swaps tied to PMI’s bonds rose after the bankruptcy filing, potentially triggering contracts totaling more than double the company’s debt.

The cost to protect the company’s debt climbed 0.7 percentage point to 75.2 percentage points upfront, according to data provider CMA. That’s about twice the level in June and means investors would pay $7.52 million initially and $500,000 annually to protect $10 million of the insurer’s obligations .

The case is In re PMI Group Inc., 11-bk-13730, U.S. Bankruptcy Court, District of Delaware (Wilmington). The Arizona case is State of Arizona v. PMI Mortgage Insurance Co., CV2011-018944, Arizona Superior Court, Maricopa County (Phoenix).

--With assistance from Shannon D. Harrington, Noah Buhayar and Mary Childs in New York. Editor: Stephen Farr, Fred Strasser

To contact the reporter on this story: Dawn McCarty in Wilmington at dmccarty@bloomberg.net; Steven Church in Wilmington, Delaware, at schurch3@bloomberg.net.

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net


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