Radian Group (RDN)

[Enterprising Investor]

Hedge Fund Manager Buys 4.9% Stake in MGIC (11/07/11)

By Nick Timiraos

A closely followed hedge fund manager known for correctly betting on the housing market’s collapse four years ago purchased a small stake in the nation’s largest mortgage insurance company in a bet that the housing market has neared bottom.

J. Kyle Bass, portfolio manager at Dallas-based Hayman Capital Management LP, bought the 4.9% stake in MGIC Investment Corp, according to federal filings. He said on Monday the bet reflected his view that the housing market’s losses had largely been absorbed. “You can see that the pig has moved through the python in terms of U.S. housing losses,” he said.

Shares of MGIC are about 10.2% higher in Monday afternoon trading, to $2.82.

The mortgage insurance industry has faced severe stress in recent months as firms are forced to pay out amid rising losses on loans they insured during the housing boom. Arizona insurance regulators took over the principal mortgage insurance subsidiary of PMI Group Inc. last month and put restrictions on its claims payments.

“Everyone paints the [mortgage insurance companies] with a broad brush that since they took PMI … they’re all going to go the way of the Dodo,” said Mr. Bass., who spoke at AmeriCatalyst 2011, a housing-industry conference.

Unlike PMI, he said MGIC has a “pretty big positive equity position,” and he said its shares could rise above Monday’s opening price of $2.58 per share even if the firm is forced by regulators to stop writing new policies. “We think they’ll be one of … the last ones standing,” he said. “We’re in it for the long haul.”

Mr. Bass said his fund would have bought a bigger stake if doing so wouldn’t trigger a provision that would have limited a tax benefit for MGIC.

Fannie Mae and Freddie Mac require loans with less than 20% down payments to have some type of credit enhancement, typically mortgage insurance. When homes are sold through foreclosure, the insurer takes the first loss.

Mortgage insurers have absorbed billions of dollars of losses and two firms have stopped writing policies this year. The surviving firms have raised prices and tightened standards, but the weak economy, stubbornly high unemployment, and declining home prices have hindered a broader recovery for the industry.

Mr. Bass said that while the housing market was still around two to three years from firmly “bottoming out,” he said any future price declines would be quite modest. “I don’t anticipate a huge decline,” he said.

In an earnings conference call last month, MGIC’s chief executive, Curt Culver, said the company’s home state regulator in Wisconsin had consulted with independent experts who determined that even in a “stress scenario” the company would have enough capital to pay its claims.

http://blogs.wsj.com/deals/2011/11/07/hedge-fund-manager-buys-4-9-stake-in-mgic/