MGIC Investment Corp (MTG) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MGIC Investment Corporation second quarter results conference call. At this time, all participant lines are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to introduce your host, Mr. Mike Zimmerman. Please go ahead.

Thank you. Good morning, and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call this morning to discuss the results for the second quarter of 2010 are Chairman and CEO, Curt Culver, Executive Vice President and CFO, Mike Lauer, and Executive Vice President of Risk Management, Larry Pierzchalski. I want to remind all participants that our earnings release of this morning which may be accessed on MGIC's website which is located at MTG.MGIC.com under Investor Information includes additional information about the Company's quarterly results that we will refer to during the call and includes certain non-GAAP financial measures. As we have indicated in this morning's press release, we have posted on our website as we have been lately the supplemental information containing characteristics of our primary risk in force and new insurance written as well as other information we think you'd find valuable.

During the course of this call, we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about those factors that could cause actual results to differ materially from those discussed on the call are contained in the quarterly earnings release. If the Company makes any forward-looking statements, we are not undertaking obligation to update those statements in the future in light of subsequent developments. Further, no interested parties should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of the press release. With that let me turn the call over to Curt.

Thank you, Mike, and good morning. In the second quarter, we reported net income of $24.6 million. This positive result, the first in almost three years, was driven primarily by lowered incurred losses and by $32 million of realized gains as we rebalanced the portfolio into taxable investments from tax exempt investments. New insurance written for the quarter totaled $2.7 billion which was up from $1.8 billion last quarter with market share approximating 20% to 21%. The lower volumes continue to be driven by the continued high share of FHA as well as a lower overall origination market. However, new insurance written in June was $1.1 billion, up from the $800 million we wrote in April and May which we attribute to the normalization of our underwriting guidelines in certain markets as well as the impact of our credit-tiered pricing introduced early in the second quarter. While persistency was 86.4%, which was up modestly from last quarter's level, cancellations continued to outpace new insurance written in the quarter, and as a result, insurance in force declined to $202 billion from $207 billion last quarter and $220 billion a year ago.

The average earned premium yield was 60 basis points which was up from 52 basis points reported last quarter. The rebound in the yield results from a reduced impact of changes to the estimates for premium refunds on expected future rescissions. Underwriting and other expenses totaled $54 million versus $59.9 million last quarter and $61.7 million in the first quarter of last year. Cash and investments totaled $9.5 billion as of June 30th. The April capital rates generated net proceeds of approximately $1.1 billion. $200 million of the proceeds were contributed to MGIC within the quarter which lowered its risk to capital ratio to 17.8 to one with a balance of proceeds remaining at the holding company. Future contributions will be influenced by the level of future writings, delinquencies, and claims, as well as the liquidity needs at the holding company.

Losses incurred declined significantly to $320 million versus $455 million last quarter and $770 million in the second quarter of last year with loss reserves now totaling $6.4 billion. The decrease in losses incurred was attributable to a decrease in the number of primary delinquent loans by 12,789 units. This follows a decline of 9,200 units in the first quarter. Regarding the remainder of the year, we expect the inventory to decline further but at a much more modest level than in the first half of the year. This more modest level of decline is driven by the assumption that new notices will exceed cures in the second half of the year, due to typical seasonal trends offset by a higher level of paid claims. The quarter over quarter decline in delinquent inventory continues to be broad-based with flow down 8,800 units, bulk down 3,900 units, the 2000 vintage down 4,500 units, the 2006 vintage down 3,400 units, and our two largest states of writing, California down 1,800 units and Florida down 1,600 units.

Our primary new notice activity was down 9.7% in the quarter, continuing a downward path that began last year. The new notice activity for the month of June includes approximately 1,200 notices that were reported to us on a delayed basis as a result of a servicing transfer. However, loss reserves were not significantly impacted as we had accounted for these delinquencies through IBNR. While primary cures and rescissions decreased 6% sequentially, they still outnumber new notices and increased 27% from the same period last year. Loan modifications, which I will discuss in more detail in a minute, continued to benefit the number of primary cures and accounted for approximately 14,800 of the cures in the quarter.

Net paid claims in the quarter were $580 million versus $519 million last quarter and $380 million in the second quarter of last year. The average paid claim was $50,900, down from $53,000 last quarter. We would expect claim payments to be at the quarterly level or slightly higher through the end of the year as most foreclosure delays have been either removed or have been incorporated into the servicers' processing time. The level of loan modifications and their ultimate performance remain the wild card, but we believe that much of the benefit associated with HAMP modifications has been realized.

Total primary and pool loss mitigation savings for the quarter were $770 million, with $267 million of that in rescission and denials, which was up from last quarter's savings of $759 million, where we had $373 million in rescissions. And the fourth quarter 2009 savings of $521 million, where we had $365 million in rescissions. The primary reason for the increased loss mitigation savings was a result of an increase in loan modifications in the quarter.

Regarding HAMP modifications. Since April 2009 a total of 65,000 of our primary delinquent loans have been reported to us as beginning the HAMP trial period of which 21,000 have cured. As of June 30th, 28,000 of the primary delinquent inventory were reported to us as being in the HAMP trial process. The number of loans modified under HAMP in the quarter totaled approximately 10,600 loans, as compared to 8,400 in Q1 and 2,300 in the fourth quarter of last year. The number of non-HAMP modifications totaled approximately 4,200 in the quarter versus 3,100 last quarter and 2,300 in the fourth quarter of last year. In total, modifications comprised approximately 31% of all cures reported which is up from 24% last quarter. Currently, the HAMP modifications are performing better than our historical redefault rate which is what we would have expected given the fact that borrower's payments are being reduced by 30% to 40%.

Now let me take a moment to address the developments in Washington, in particular, the Dodd-Frank Bill, GSE reform, and potential changes at FHA. As many of are you aware, the Dodd-Frank Bill was recently approved by Congress, and the President is expected to sign it into law. As to its impact on our business, this bill contains a provision which exempts qualified residential mortgages, or QRMs, from any risk retention requirements, and the FHA, VA, and Rural Housing loans are fully exempt from risk retention requirements. The legislation delegates to the SEC, FDIC, OCC, the Fed, FHFA, and HUD, the power to determine what non-exempt loans are QRMs and provide a list of suggested attributes that the regulators should consider in determining a QRM. Importantly, when attributes specifically deals with mortgage insurance. The regulators have 270 days from the date of enactment which is the day that the President signs the bill to issue regulations defining a qualified mortgage. The fact that mortgage insurance is listed in the legislation as a factor for the regulators to consider is very positive for our industry, and as such, the industry will be making its case to regulators in the very near future about the valuable role mortgage insurance plays in reducing defaults. Bank regulators already recognize the value of mortgage insurance in their capital rules by allowing banks to hold less capital as higher ratio loans are insured, and we believe they will continue to recognize the industry's value.

Regarding GSE legislation, nothing definitive has been done to date on legislation to reform the GSEs. However, the Dodd-Frank Bill requires the administration to come out with a proposal on the GSEs early next year. Because all the focus of the relevant committees has been on financial reform there has been no real thought given to what the new GSEs would look like. Statements from key players have indicated that they will not have the same structure as they have now, and most people believe they will not be purely private entities. Industry groups who have issued plans or policy statements generally agree that there has to be some government role. Regarding the role of private mortgage insurance, it is our industry's belief that policymakers recognize the need for private sector capital at risk in order to ensure that prudent loans are underwritten and securitized. MI is a private sector capital at risk, and its regulator model has worked. Policymakers also recognize these facts, and therefore, we believe mortgage insurance will continue to play an important designated role in the new GSEs.

Finally, on FHA, the administration has proposed a number of reforms to FHA. Some of which FHA simply could implement, and some which require legislation. The reforms were designed to reduce fraud and bad practices generally, and to enable FHA's premium structure to more closely match the way our industry evaluates and prices risk. However, the new premiums must be approved in legislation. Under present law, FHA charges enough for a premium that can go as high as 3%, and it can be financed. At the moment, FHA charges 225 basis points up front. Also under present law, FHA can charge a 55 basis point annual premium for loans with LTVs above 95% and 50 basis points for loans with LTVs below 95%. The FHA reform law proposes that FHA be allowed to raise its annual premiums to as high as 150 basis points for loans with LTVs below 95% and 155 basis points for loans with LTVs above 95%. Once the FHA reform law passes, FHA Commissioner Dave Stevens testified that FHA intends to reduce its upfront premium, which can still be financed, to 1%, while raising the annual premium which must be paid in cash to 85 basis points for loans with LTVs below 95% and 90 basis points for loans with LTVs above 95%.

The House has passed the legislation to, among other things, change FHA's premium structure along the lines just discussed. The Senate has taken no action so far. There are very few legislative weeks left prior to Congress recessing for the elections, so it will be a difficult -- to find time on the Senate floor to consider the FHA bill separately. The general belief is that the change to FHA's premium structure will be done in an omnibus appropriations bill that will be considered probably in a lame duck session as very few appropriations bills have been completed by Congress. Therefore, the current thinking is that the unfinished appropriations bill will be wrapped up into one bill and passed prior to this Congress adjourning. The change in FHA's premiums is scored as raising money and it is not controversial. Therefore, it is likely to be in that omnibus bill.

Getting back to our business, let me conclude by saying that while we are pleased and encouraged by the second quarter results which were primarily driven by the decline in delinquency inventory, our results for second half of the year will depend on the delinquency development we experience for the remainder of the year. Operator, let's take questions.

(Operator Instructions) Our first question is from Matthew Howlett. Go ahead, please.

Thanks for taking my question. Congratulations on returning to profitability. Just, Curt, just on the seasonality or the delinquency guidance second half of the year. Are you taking into account what perceives to be burnout on your older book -- the '07 or earlier vintages? Or are you just looking at typical seasonal trends in saying we're expected to see this in the second half of the year?

I am going to let Larry take that.

Yes. We look at both. Both the underlying trend, i.e., the burnout of the various segments you are talking about, and you overlay the seasonality to that. So we take both into account, and we feel that, as Curt mentioned, we'll be down but not as much as the first quarter. The other thing is it is not only new notices but cures. We're coming into a weaker cure part of the year, and HAMP we think as we, I think, stated -- some of the benefits -- most of the benefit of HAMP is behind us. So we see that another month or two before waning.

And there is a lot of factors playing into that which there is still not a lot of transparency on. I think the seasonality probably is considered more than the credit burnout as we look at things. But a lot of factors, as Larry discussed, that could impact it positively or negatively.

Just on the mods, Bank of America is out today saying half the mods completed in the first half of the year were outside of HAMP, or even more than half. Do you have an idea of what percentage of your delinquent inventory is in alternative programs, outside of HAMP?

Matt, this is Mike Zimmerman. The reporting on the non-HAMP is -- the HAMP reporting is not very robust, and that is a little less than that. So I would say we don't have a good handle on that at this point. I will tell you in the quarter though, about two thirds of our modifications were HAMP, and one third were non-HAMP. That mix shift in the first quarter was 75% HAMP and 25% non-HAMP. So we see similar, I'd say, trends. The general market, which isn't surprising given they are the ones doing the work.

I think you see a lot of servicers moving to outside HAMP, and also refinancing loans within this center and captured under that HAMP model.

Great. Just the last question on the average reserve per delinquency went up at a decelerated pace this quarter. Any reason for that? Are you getting more cures in the late stage buckets from these mods? What do you see in the back of the year?

It's Mike. I think the thing that you will see when we report the quarter, we added some information on the age. And you will see that of the 228,000 delinquencies, 53% or 121,000, are over twelve missed payments. And that was up -- it was 47% in the first quarter and 42% in the fourth quarter. So that trend continues. The aging part of that -- those delinquencies continue. That's part of that factor.

Great. Thanks, buys.

Thank you.

Thank you. Our next question is from Lee [Huberman]. Go ahead, please.

Congratulations. I guess a very sophomoric question, but I trust you guys. How do you feel things are unfolding? Are you constructive in what's going on? Do you feel it moving in the right direction? That this turn is sustainable? We have all the numbers. I am just curious qualitatively what is your sense of things?

Well, from my perspective, I feel better about the loss side of the business than I would have six months ago. On the revenue side I continue to be discouraged by what's happened there relative to new insurance written and our lack of competitiveness against FHA, and the fact that they're losing lots of money and not changing premium rates. Now, within that, I do think as I mentioned in my comments that through the omnibus bill they will change the premium rate structure which will make our industry very competitive relative to FHA and should ignite new insurance written next year. But it has been a long time waiting for them when they drift down to 53 basis points of surplus that they don't address that sooner.

Back to my original, I feel good obviously about the delinquency performance. It has outperformed our expectations that we had at the beginning of the year. We hope it is not just due to seasonal factors that, as Matt asked, that there is quite a burnout within that also that we're seeing as well as the impact of the modification programs are positive, and we don't see redefaults. The other challenge within those redefaults though, Lee, is what's going on with employment which we can't control, and we hope we're moving forward as a country on that. But that's the challenge.

Thank you very much. Good luck.

Thanks.

Thank you. Our next question is from Steve Stelmach. Go ahead, please.

Good morning.

Good morning.

Just moving away from credit for a second. On the average premium, you mentioned it was an issue of lower rescissions this quarter, and that makes sense. How should we think about that going forward as rescission activity slows down? Can we expect that average premium yield to continue to inch higher? Or at some point does the lower premiums of the new business being ran through offset that? And how do we think about that in the back half of the year?

On the newer business, I think our average premium on the new business is -- even with the impact of the risk-based pricing is 62, 63 basis points, in that area. So it is slightly above the -- I think the 60 average yield we reported. And as rescissions trend down as a percent, I would assume that the adjustment for rescissions would diminish.

Okay. And then secondly, just on the loss side. Geographically, anywhere that you're more or less concerned today than maybe you were six months ago? Has that changed at all?

Geographically? Geographically do we have concerns that we didn't have six months ago?

No. We made some market moves to the positive becoming less restrictive in the coastal CBSAs of California. We're still restrictive in the Florida, Nevada, Arizona, and we're cautious, in general I would say, on rate and terms that aren't ours. We don't want to pick up some of that collateral risk, especially in markets that have seen some good price declines.

Okay. Thank you very much.

Thank you.

Thank you. Our next question is from Mike Grasher. Go ahead, please.

Thanks. Good morning, everyone. Wanted to follow up on the discussion around HAMP, and your expectation that most of the benefit from HAMP has been realized to this point. I guess my perception is that the administration, the Treasury, extremely disappointed in the program and would likely be ramping up efforts if not the second half of this year certainly throughout this year and into next. Certainly makes sense. I think you have 10%, 28,000 loans -- 10% of your inventory sort of playing along here. But can you talk a little bit more about the future of HAMP from your perspective in terms of why you don't think it would impact any -- either in terms of the current delinquencies or future?

Well, to me it is mathematics. There is just not that many more loans that can be modified under the present program. Now, if you get into a program that you seem to be talking about, Mike, that they're going to change the rules. It may -- the only thing I can speculate from that would be principle or something other than what they've done to date. Well, then that is a whole new ballgame. My comment is related to the rules now. We have got 28,000 loans versus what we had 65,000 prior. And the whole pool of mortgages is being modified or refinanced through either these programs or others in the marketplace. So I just think, Mike, you are talking about credit burnout. Here you are talking about mod burnout -- under the present programs. Now if they change the rules, all bets are off.

Got you. Okay. Second question would be the assumptions, and maybe Mike can address this -- the assumptions that you have around severity in real estate values on current delinquencies if you think about a multiplier in terms of ramping up reserves. Are you concerned? How concerned are you about continued rollover in real estate valuation?

We're not anticipating any increase in severity, pretty much flat. The only thing that would have changed would have been claim rates relative to the aging as I mentioned a little bit earlier. The fact that a greater percentage of the delinquencies are over a year now. So we have seen that deterioration, but not on severity. And we don't forecast that.

Okay. Going forward pretty much flat on severity.

Okay. One final question just in terms of new notices. Is it strictly related to employment issues?

Well, it is again, it's -- as Larry mentioned, it is seasonality in the second half of the year. Whether or not we'll see that traditional seasonality will have to wait. We do issue now monthly the roll so will you see the information as fast as we do. We'll tell you what the roll is, and so we're anxiously awaiting the next three or four months also to see if in fact we get some traditional seasonality. Or in fact do we get a continual runoff at this rate. In the last couple of quarters, the notices and cures have been pretty much flat, and the delinquencies have gone with respect to paid claims and rescissions. If that trend continues, that's very positive. If in fact, we get some seasonal adjustment on cures. The other positive impact that we have had we didn't talk about is that there haven't been any -- very seldom or very small amount of delinquencies on the '09 obviously and 2010 book. So those books are performing very well, and traditionally you would see some type of increase in the '09 book. We have not seen anything at all on that. So that was a positive development. We'll have to see if that continues.

Okay. Thanks very much for your commentary.

Yes. Thanks.

Thank you. Our next question is from Donna Halverstadt. Go ahead, please.

Good morning. Had a couple of questions for you. During the second quarter, there was a settlement you entered into regarding rescission practices. Can you offer any commentary as to whether or not the details of that settlement have any implications positive or negative for the Countrywide lawsuit? And separate from that question, can you at least give us your current expected timeframe over which the Countrywide lawsuit should play out?

I don't think we can comment relative to the impact on what the Countrywide settlement may be relative to the timing or--.

This is Mike Zimmerman. That's just -- we have updated what information we have, and there has been I will say the typical progress on those types of litigations moving forward. And the ultimate timing is unpredictable.

Okay.

Those risk factors are pretty complete. So that's -- pretty much says as much as we can say.

Okay. Thinking about rescissions more generally, certainly expected those to trend down. But when you look at the pool of loans that are still rescindable, have you lowered your sights on the portion of those loans that you will actually rescind?

The rescission rate -- the misrepresentation tends to be more in the '06, '07, certain geographies, certain product segments. Those segments with the higher notices of delinquency. A lot of those segments are burning out more so because of the higher delinquency rates, and as a result of that, the rescission rate percentage is starting to come down. Now, our claims received coming in the door is still increasing month to month. But as a percentage, we see the rescissions tapering off, but working against that in terms of absolute dollars the higher level of claims received -- claims paid coming down the road here.

Now, I understand that. My question was more -- let's say that a year ago there were 100 loans, and you thought they didn't meet guidelines. I would have assumed you would rescind them all. Now, let's say you still have another 100 there that look like they don't meet guidelines. Would you still rescind 100? Or because of pushbacks and settlements and whatnot, are you going to rescind some lower percentage?

Donna, we haven't changed the rules, I think is your question. It's just that the loans that we would rescind on that pool is smaller than we thought it would be.

Okay. All right. And then is your NIW guidance for 2010 still $10 billion to $15 billion?

Yes. I would say in that -- the wild card within that, as we stand here right now without a change in FHA, yes. And that's the wild card relative to the premium rates that I would think it would be higher than that if the premium rates are changed as the legislation or as Dave Stevens has testified he would like to do.

Okay. Great. Thank you very much.

Thank you. Our next question is from Mike Grondahl. Go ahead, please.

A couple questions, guys and thanks for taking them. Are lower interest rates helping your customers at all refinance? And secondly, one of the risk factors in the press release talked about a settlement with one of your lenders. Can you kind of help us understand the financial impact from that settlement?

Mike, on the re-fi, the low rates, that primarily is going to be through HARP refinances. You have seen our release. I think we had less than 20% refinance volume in the NIW. So much lower than the overall market. But it is primarily HARP, and there was $600 million or $700 million of volume, if you will, written through that program in the quarter. That's the primary benefit.

The issue with the lower rates is the lower rates are there, but because of what happened to home values, a lot of people can't refinance without having to put more cash into the deal.

Got you. So those low rates really aren't helping your customers yet?

Borrowers.

To the extent that those $700 million loans that got refinanced. Those borrowers have a good advantage and it has been over $1 billion -- $2 billion or $3 billion for the full-year.

I think they have helped a great deal. Any of those could have been candidates for delinquency or something else when the lower payment, they are in a much better risk position for us than they would have been -- than they were. So I see it as very beneficial to the business.

Mike, relative to the settlement, as we disclosed in the release. We deem it nonmaterial to our financial conditions and reserves. So that gives you, if you will, an order of magnitude of the financial impact. It's not material and limited to what we have said is that we have entered into this settlement where it will give us certain rescission rights in exchange for contributions from the borrowers -- or from the lenders. And that's really the extent of it. It is nonmaterial from a financial perspective.

Okay. Do you see the potential for other settlements like that?

That's something that has been to the future, we'll have to wait and see.

Okay.

Yes, we'll have to wait and see on those, Mike.

Just lastly, what would you suggest investors or analysts look at to try to gauge burnout in your portfolio in the various books? Is there something to go to help us understand and monitor what's winning burnout or seasonality in the second half of the year?

We are giving you the vintages. You see the vintages each quarter, and then in addition to that on a monthly basis now, we have been giving you on an overall basis the rollout of delinquencies. So you can see the new notice activity, cures, rescissions. That's a pretty good benchmark. If you think about the financials, obviously, the biggest impact for the quarter was the decrease in incurred losses. And as Curt said, that was all directly attributable to the decreased delinquency. As these financials run, notwithstanding revenues, you got a pretty good fix on that. The incurred loss number is most significant as we turn the corner, and it will be dependent upon that role of delinquencies and what's happening to new notices and cures. And we'll be giving you that every month. And then every quarter giving you, if you will, the vintage balances by book. So it is a pretty good indicator of what's happening.

Sure.

Other than that, Mike, there are all sorts of private vendors out there that will be willing to sell you all sorts of data, but from our perspective that's what we have.

Okay. Great.

Thanks, Mike.

Thank you. Our next question is from John Evans. Go ahead, please.

You raised about $1.1 billion in capital. Can you talk a little bit about uses of that capital? Do you think you will bring back the interest on the convert? And you were very aggressive in buying back some of your debt early at very favorable prices. Can you talk a little bit about that?

We have got -- as I mentioned, or Curt mentioned early in the call -- we did put $200 million down to MGIC, and use that for supporting the core Company. We don't anticipate putting any additional capital down the balance of the year relative to risk to capital levels. There is about $1 billion at the holding Company. Relative to the repurchase of the debt, at that time, it was trading at a significant discount. And now it is trading at par. So there isn't much opportunity there, and then relative to the reinstatement of the interest on the convert, we have not made a decision on that as of this date.

And can you just tell me what -- is that a Board decision? Or what will trigger that because it is in arrears, right?

That's correct. The next payment is due, I believe, October something. So if in fact we're going to do that, we'll decide between now and that date.

With the Board.

With the Board, yes.

Okay. Great. Thank you so much.

You bet.

Thank you. Our next question is from Mahmoud Reza. Go ahead, please.

Mahmoud?

Hello. Sorry. I didn't realize that was me.

I have days like that, too.

I heard Ahmad Razad. That's another guy. I actually wanted to ask -- going through the release I think a lot of people were a little worried just reading the language in there. Especially given the language on the seasonality in the business that you are expecting material deterioration in the second half. But it is not like we're expecting a doubling of reserving needs for the second half. And assuming that that's not the case, what has seasonality been historically in Q3 and Q4 like the deterioration that one would normally expect?

Well, traditionally these books -- normal MI books -- you would see a decrease in delinquencies in the first and second quarter and increases in the third and fourth quarter. That would be a traditional. We're not as much in a traditional environment right now because of a couple of factors. First of all, the largest impact of these delinquencies, as Larry mentioned, was the '05, '06 and '07 book, and they have already turned. Then again, as I mentioned, the '09 book, obviously, is performing very well and the second half of '08. So we have not seen the same type of increase out of the most recent books which is very positive. So all of that has, I guess we caution and say that in traditional markets you would see an increase. We're not sure if they're going to -- we're going to see an increase. The question we have is will the decrease be as significant in the second half of the year as it was in the first. And to that end, I would say we'll report to you every month what exactly the roll rate is on those. And you will get the same information the same time we do.

Sorry. I want to get a number -- outside of what you have seen in the '05, '06, '07 book. In a normal year, and obviously this is not a normal time, but is it sort of like a 5% to 10% increase in the delinquency that you would expect Q3 over Q2? Or is that too aggressive or too low?

I don't have all the seasonal factors by month right in front of me, but in general, February-March is probably 0.85, 0.9. And as you get into the third quarter here it is like 1.05, so on and so forth. So the seasonality patterns are there. The question is whether the underlying trend trumps the seasonal. What we saw in the first quarter -- the first half was we had seasonal benefit, and on top of that we had favorable burnout on top of that. So we got a pretty good decline, and then the question for the second half is you got the seasonal working against you. We still think there are some positive underlying trends, but how much one offsets the other is kind of the question.

Got it. And then second quick question would be, I know you commented on the rescission agreement you had with a customer, and that there is no net financial impact on the financial statements.

Minimal. It was included in our -- and as I stated, it was included in our estimates for reserves.

Got it.

The impact of that.

So how should we think about the economic impact and the rationale for doing it? Is it more of a relationship move versus having to consistently worry -- put resources to having to go through loan files and dispute things? Or what's the logic behind that?

It's a combination of just what you said. To me, I characterize it as a fair agreement for both companies that was driven probably as much by all -- them having to get documentation to us within the process, and their reluctance -- or just the cost of doing that on their part. And for us, a number of these areas are gray areas. When you get on the fringe, and by not doing this, it also allows us not to invoke the cost of investigation which are about $1,000 a loan. So I think as much as anything, it was driven by the fact of we're going to have this many. Let's get an estimate around that number, and just say here is what we will do. And we don't have to go through all this processing that both companies have to go through. And as a result, it is a good settlement for both companies.

Got it. Great. Thank you very much.

Thank you. Our next question is from Roy Astrachan. Go ahead, please.

My question has been answered. Thank you.

Our next question is from Matt [Cutter]. Go ahead, please.

Matt, are you there?

Yes. Sorry about that. Just a couple of quick questions. First, just on that servicer delay and the 1,200 in delinquencies in June. Was there any impact then on the cures in June as well?

Yes, there was. It was about 300 or 400.

300 or 400. Okay. Great. Just second, you talked about the fact -- you talked about mods trending better than historical levels. Can you just remind us what historical levels you go by?

On the redefault rate?

Yes. Exactly.

I talked about on the HAMP. I think traditionally we have been about 50% to 55% redefault rate on the MGIC modifications that we have done forever. And the key within that, Matt, is the fact that on the modifications that we have done in the past, we have never reduced the payment. It has always increased actually as you capitalize the loan and you get a larger payment. But they now have employment, and so they're willing to pay a higher. These -- you have got cases where the payments are reduced anywhere from 30% to 40%. So the redefault rate, and we're seeing this although we're not going to get the number to date because it is still too new -- that it should be better because you have got mortgages, people in one case that are payments have been reduced 30% to 40% versus the redefault rate at 55% where their payments were going up. You would expect them to outperform that. And initially we're seeing that, and I would expect that to hold.

Great. That's helpful. Lastly, given the importance of -- as you talked about those 3Q and 4Q delinquency trends. Any color on how July performed so far?

It is too early. We haven't gotten the data yet. We'll publish that in August. We get it late in the month and process it through this now.

Great. Thank you.

You bet.

Thank you. Our next question is from Michael Levine. Go ahead, please.

Hello. Thanks. I just have a follow-up to the question on the 9% convert. Is there any penalty to not going current on that? Or is it simply -- it's just in arrears?

The interest continues to compound on all the deferrals. I guess that would be the penalty. Nothing additional to that.

Thank you.

Thank you.

Thank you. Our next question is from Matthew Howlett. Go ahead, please.

Thanks for taking my follow-up. Maybe you can answer the disconnect between your current paid loss run rate and what you're forecasting and what you appear to be reserved for. You would need to see essentially a doubling of paid losses to filter through your inventory over the next two and-a-half to three years. And I know you're forecasting it, but given the government controls half the delinquencies basically in the United States. They control even more of yours. And they are parading around saying that only 10% of HAMP trials that failed went to foreclosure. What's the timeframe on when that inventory will be actually liquidated, if at all?

Our delinquency -- I am not sure.

Matt, let me restate the question. You are asking about the some 220,000-some delinquent loans -- the rate of claim of which those will go to, you are suggesting that it will be de minimus because of government interaction and intervention. And currently, we're not seeing it. We're seeing a great deal of those go to a higher claim rate. To the extent that some other intervention takes place that delays that, then that estimate -- our estimate would have to change.

Right. So no material change in the paid loss forecast for at least the second half of the year, and presumably, we will see it go up in 2011?

Exactly. We're forecasting paid to the increase in the third and fourth and certainly because of the inventory we have to increase in next year. Paid in next year will be higher materially than this year.

Great. Thanks. Just post the capital raise, have you seen a positive reaction from your relationships with banks and customers given the capital raise? Has there been some reaction on that front?

Yes. Every case, it has been positive. It has, I think, allowed us where we had concerns and not only just for our Company but our industry. And others followed us in that capital raise within the industry. It has been very beneficial with our customer group and also in Washington.

Great. Thank you.

You bet.

Thank you. Our next question is from Ed Groshans. Go ahead, please.

Hi, Curt, Mike, and Mike.

Hello, Ed.

Thank you for taking my call, my question here. It is a pretty simple one. Curt, in your opening comments, you mentioned about the QRMs and going through there. And you mentioned the FHA and VA not having risk retention. And I guess the real issue comes down to a decision of does the eligibility as a QRM win for risk retention? Or does the exclusion of Fannie and Freddie from risk retention win? And I know it is new, and I know it is not even signed yet, but I was just wondering if you guys looked into that? And any impact that that could have?

Well, again, it is my own view that the GSEs will sit under that umbrella relative to not being -- or will be a qualified mortgage for securitization reasons. It is very important for us to be listed as one of the attributes to a qualified risk mortgages that they reduce default and mortgage insurance is listed as one of those aspects that does that. And certainly we have a demonstration of it. We have a wonderful presentation on that relative to the various regulatory bodies that demonstrates that. So I clearly think we have a great case to make. I think there was a lot of politics involved within that definition, and who qualified and who didn't initially. But I think those will be worked out to the right result. The GSEs need to be part of that definition.

It was odd that they excluded them, right?

I think there were a lot of politics involved, and so I can't comment on it any further.

It's Mike. I would say the language did not exclude them. What it did was it defined what a federal agency was, and it said Freddie and Fannie are not a federal agency. So it did not say that they don't qualify as a qualified risk -- qualified mortgage. That's to be determined by this regulatory interagency panel.

But when you go through the attributes, I think you will see that they certainly will be -- it is my feeling they will be characterized as such after that.

Okay. And then on the next -- and you mentioned that FHA is probably not in the best fiscal health. And that they need to go through the bill and try to raise their fees. Do you think there is any room for mortgage insurance to work with FHA and the VA? Is there excess risk insurance they can do with things along those lines that could be a different business line? They got what they needed, right, not doing well as it is?

I think it is something, Ed, that we have talked to them about over the years and talked in more detail in the recent year. We know the management at FHA, if you will very well, with Dave and Bob Ryan. And clearly, there are attributes that both can bring to the table. I think that would make the housing finance system even better, and the government obviously has capital and the mortgage insurance side of the business has a lot of strength and customer relationships, processing, and things of that sort. So I think there is a great opportunity there over time. There is so much stuff going on that it is hard to get the attention. But I think it truly would be a win-win for everyone if we could work out a public-private partnership, and there have been discussions to that extent although very preliminary discussions.

Great. Thank you very much for taking my questions. Have a good day.

(Operator Instructions) Our next question is from Bruce Harting. Go ahead, please.

Curt, in your second to last slide Flow New Insurance Written Characteristics, what would you say is the binding constraint on seeing more volume from your perspective -- the FHA issue aside? Are these 90 LTV percentages of your total volume? Seems to me that would be the largest we have seen in memory, right, the last few quarters where you are doing that much volume at 90? So my question is, what's the binding constraint? Is it the lenders lowering FICO somewhat? Or lowering LTV to see more re-fi volume? Do you have a view?

The binding constraint to me, and you said not considering FHA. But I can't help but consider FHA because the monthly premium is significantly less than our industry's even though the total cost to the borrower through private mortgage insurance is cheaper going through private mortgage insurance the fact of the matter is the monthly payment because we can't capitalize our upfront premium and the loan is higher to them. And as a result, that's what sellers sell. The other important attribute to that is not only the monthly premium lower, but they can do 3.5% down, and our industry shied away from that clearly in certain markets in particular. So that combination of both the lower premium although a higher cost to the borrower, but we haven't been able to make that case to our customers well enough. But then also the fact that the 3.5% down in many markets where they have weak geography is very difficult for us also. Again, I look forward to FHA premium rates being dealt with, and also as I think what you are mentioning, we're having a stabilization of real estate markets and we're going to be able to do more LTVs and a little lower FICOs in markets as markets stabilize.

Okay. Thank you.

Thank you. Our next question is from Chris Owens. Go ahead, please.

Hi, guys. Congratulations on the quarter. Just wondering if you could quantify the impact of the lower NODs versus the true-up on the incurred line? The true-up for the aging of the delinquency pool?

Trying to allocate the losses occurred between new notices and the rolling of the aging?

Yes. Again, as I mentioned, the severity is pretty much -- was flat for the quarter. Just a very modest increase in rate and that had the claim rate. That had to do with the change in the aging. So there wasn't much significant change, if you will, other than the change in rate and the increase in the number of loans. As I mentioned, there was 120,000, almost 122,000 loans that were over a year old that was up from 114,000 in the first quarter. So that was the principle change.

Okay. And then the other question would be, I think you guys have alluded to the fact that you look at a 12-month cohort cure rate to establish reserves. As that--.

Chris. Among other things.

Among many. It is one cohort that we look at for that bucket. Yes.

Sure.

There is a combination of factors. It is by geography, by type of loan as well as age. Okay? And belt versus flow.

As you look at that and as that 12-month becomes more predominantly weighted in 2010, does that sort of buy us downside protection on what could be going into a more -- weaker seasonal period? Or is that pretty minimal? I guess as the average becomes more in 2010 versus 2009, and cures have obviously been better this year than last year? What does that do on a reserving perspective?

I think if you think about it traditionally, what we're seeing is if you think about it, there is less newer notices coming in because the books are performing better. The severity might be less, claim rates would be less. So to your point, as you get out in time you would start to see lower average rates in severity, and I think that's your question. That's what should evolve over time.

As the mix of the inventory shifts toward these newer delinquent inventory shifts towards the newer books from the '06, '07-type books.

So sort of following that through, what's the tipping point when the average reserve per loan stops going down -- like, based on this trend, where do you guys sort of see that inflection point occurring?

That might happen this year depending on as I mentioned before -- depending on what happens in the next six months. And firstly, the next quarter if we continue to see the trends that we saw that would be significant. If we experience the same trends that we experienced in the first half of the year to the second half of the year, that would be significant.

Okay. Thank you very much and congratulations.

Thanks, Chris.

Thank you. I am showing no further questions at this time, sir.

Thank you. Again, thank you all for your interest in our Company, and have a wonderful day. Thanks all.

Ladies and gentlemen, thank you for your participation. That concludes the conference. You may disconnect. Have a wonderful day.