MGIC Investment Corp (MTG) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MGIC Investment Corporation's third quarter earnings conference call . At this time, all lines are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Mike Zimmerman, Senior Vice President, Investor Relations. Please

Thanks, Sean. Good morning, and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call today to discuss the results for the third 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 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 supplemental information containing characteristics of our primary risk in force and new insurance written as well as other information which we think you will 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 an 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.

Thanks, Mike, and good morning. In the third quarter, we reported a net loss of $51.5 million versus $517.8 million loss in the third quarter of last year. When compared to the second quarter, the quarterly operating loss was driven primarily by higher incurred losses. New insurance written for the quarter totaled $3.5 billion, up from $2.7 billion last quarter and $1.8 billion in the first quarter. New insurance written does not include $831 million of HARP refinance transactions completed during the quarter on loans we already insured as we treat such volume as modifications. Year-to-date, we have completed $2.2 billion of HARP refinance transactions.

Overall insurance volume remains muted due to lower home sales and the continued strong presence of FHA. The private mortgage insurance industry market share of total originations was approximately 5.1% in the quarter up from 4.5% last quarter and up from the low of 3.6% in the fourth quarter of 2009. Our market share within our industry held steady at approximately 22% in the third quarter. As many of you are aware, the FHA received legislative authority to change -- to increase its monthly premium effective October fourth. And this change has been long discussed, and we're pleased to see that it happened sooner than we expected. This change, combined with our credit-tiered pricing, makes our product the best execution for 90% LTV loans with 680 and higher FICO scores and 95% LTV loans for borrowers with 720 and higher FICO scores. While the FHA continues to offer 3.5% downpayments, we expect that the industry will continue to regain share, albeit slowly, for a significant portion of first time homebuyers as borrowers, originators, and realtors recognize the financial and operational benefits of conventional financing.

Persistency in the quarter was 85.7% which was down modestly from last quarter's level of 86.4%. Cash cancellations continue to outpace new insurance written in the quarter, and as a result, insurance in force declined to $197 billion from $202 billion(Sic-see press release) last quarter and $217 billion a year ago. The average earned premium yield was 59.4 basis points, effectively flat to last quarter's rate of 60 basis points. Underwriting and other expenses totaled $57.6 million versus $54 million last quarter and $59.1 million in the third quarter of last year. Cash and investments totaled $9.3 billion as of September 30th.

In the third quarter, we realized gains of $24.5 million as we continued to rebalance the portfolio to reduce municipal assets in view of our NOLs. As a result of increased unrealized gains on investments and GAAP requirements, we booked taxes of $25.6 million in equity and recorded a tax benefit on the income statement that entirely offset that amount. Also during the quarter, we reached a tentative settlement agreement with the IRS concerning our tax basis and a number of our REMIC residual interests. We expect to finalize that agreement in the fourth quarter. We adjusted our tax provisions and liabilities to reflect this agreement. Finally, risk to capital ratio was down modestly to 17.7 to one, primarily as a result of the decline in total risk in force.

As expected, losses incurred increased during the quarter to $385 million versus $320 million last quarter but were down significantly from $971 million in the third quarter of last year with loss reserves now totaling $6.2 billion. The increase in losses incurred this quarter versus the second quarter was attributable to a slower decline in the number of primary delinquent loans which fell by 5,082 units as compared to a decline of 12,789 units in the second quarter. The slower rate of decline reflects the higher level of claim payments of 11,722 claims paid compared to 10,653 claims paid in the second quarter being offset by the fact that there were 6,600 more notices than cures during the quarter. Regarding the remainder of the year and reflecting typical seasonal patterns, we continue to expect the inventory to decline at this more modest level as the excess of new notices over cures will be more than offset by a higher level of paid claims. The decline in the delinquent inventory continues to be broad-based with flow down 1.6%, bulk down 4%, the 2007 vintage down 2.7%, the 2006 vintage down 3.7%. And our two largest states of insurance in force, California down 8% and Florida down 4.5%.

Again, as we expected and discussed last quarter, both completed and new trial HAMP modifications slowed during the quarter. As of September 30th , 19,800 of the primary delinquent inventory were reported to us as being active in the HAMP trial process which is down from approximately 28,000 loans last quarter. In the quarter, there were approximately 1,500 new trials reported. The number of loans modified under HAMP in the quarter totaled approximately 5,400 loans as compared to 10,600 in the second quarter and 8,400 in the first quarter. HAMP continues to be replaced with non-government or non-government modification programs whose cures increased to 6,600 from approximately 4,200 in the last quarter and 3,200 in the first quarter of this year. In total, modifications comprised approximately 28% of all primary cures reported compared to 31% 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 borrowers' payments are being reduced by 30% to 40%. The level of loan modifications and their ultimate performance remain the wild card, but as I stated last quarter, we believe that substantially all of the benefit associated with HAMP modifications has been realized.

Net paid claims in the quarter were $588 million versus $580 million last quarter and $417 million in the third quarter of last year. The average paid claim was $48,800, down from $50,900 last quarter. The decrease in the average claim size is primarily due to bulk comprising a smaller percentage of the overall claim payments. We would expect the dollar amount of claim payments in the fourth quarter to be at a higher level than the third given that there are approximately 21,000 claims that have been received but not yet paid. Total primary and pool loss mitigation savings for the quarter were $663 million with $262 million of that in rescissions and denials which was down from last quarter's savings of $770 million where we had $267 million in rescissions. As I stated last quarter, we believe that the portion of claims resolved through rescissions has peaked, and that it will decline over the next several quarters although the rate of decline is difficult to estimate accurately.

Now let me take a moment to address some of the more macro factors relative to our Company and industry, and in particular, the implementation of the Dodd-Frank Bill, GSE reform, and most recently, foreclosures. As many of are you aware, the Dodd-Frank Bill contains a provision which exempts qualified residential mortgages, or QRMs, from any risk retention requirements. The regulators have until mid-April 2011 to issue regulations defining a qualified mortgage. Our industry has been meeting with various regulatory agencies and congressional staffs about the valuable role mortgage insurance plays in reducing the effect that defaults have on lenders, and we continue to believe they will continue to recognize the industry's value when the final definition of QRMs is issued.

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 no later than January 31, 2011. About all we know for sure is that based on statement by key players, the GSEs will not have the same structure as they have now. Industry groups and others have issued plans or policy statements that generally agree there has to be some government role. To restate what I said last quarter, it is our industry's belief that policymakers recognize the value our industry provides. That is, they see the need for private sector capital to be at risk, or the need to ensure that there is some skin in the game. And they recognize that MI is a private sector capital at risk, and that its regulatory model has proven effective. In addition, private mortgage insurance also helps reduce taxpayer risk by providing underwriting and financial protection to the GSEs and by serving as an alternative to 100% government insurance. Therefore, we believe mortgage insurance will continue to play an important role in the housing finance system whatever form the GSE model ultimately takes.

Finally, let me discuss how we see the recent issues surrounding foreclosures impacting us. A number of large servicers have temporary suspended foreclosure actions as a result of concerns about how the paperwork has been developed. An additional 50 attorney generals have initiated a joint investigation, and Congress will be holding hearings next month. We expect that this will cause a slowing pace of claims to be filed with us over the coming months. However, when this will happen and how long it will take -- or how long it will last is an unknown that we don't think can be reasonably estimated at this time. In the short run as I mentioned earlier, we do believe our expectation of a slowing claims pace -- we do not believe our expectation of a slowing claims pace to impact the anticipated level of claims stated in the fourth quarter given the level of claims already in our inventory.

Turning to the impact on our loss reserves of foreclosure delays due to these events, our policy requires that in order for a servicer to be entitled to a claim payment, they must begin foreclosure within four months of the delinquency and diligently pursue these proceedings. If that requirement is not met, we do not cover interest and expenses associated with such delay. We look at whether the loan was administrated properly by the servicer including diligently pursuing foreclosure, by requiring as part of the claim filing that the servicer submit all of their collection and loss mitigation activity as well as the chronology of events between the first delinquency date and the claim filing date. To the extent that there is an undue delay or expense, the claim will be paid, but the amount curtailed. So all in all, based on what has happened so far, we see this as more of a timing delay and not an event that would cause either increased or materially decreased exposure to MGIC. Obviously, we will closely monitor the situation for any developments that could impact us beyond what I already described. In this regard, our process assumes claims presented to us represent valid foreclosures. I don't think anyone knows today on a definitive basis what effect improprieties that is may have occurred in a particular foreclosure have on the validity of that foreclosure once it was completed and the property transferred to the lender. All I can say for now is that we are watching the issue and will act appropriately.

In the meantime, getting back to our business, let me say that I am pleased and encouraged by the changes in our competitive position versus the FHA and expect that we will continue to increase our market share versus the FHA. With that Sean, let's

(Operator Instructions) Our first question comes from Steve Stelmach with FBR Capital Markets.

Hello. Good morning.

Good morning.

Just to develop on the disclosure -- or the foreclosure issues that you just discussed, does any of the news that came to light over the past couple of weeks, strengthen your position when you're talking about rescission activities with the lenders? Is it providing more evidence? Or, is it just simply a reaffirmation of what you already expected?

Steve, this is Mike. Really when it comes to the foreclosures as Kurt said, we get the documentation that he described which is the collection activity, the loss mitigation efforts. And, it's a review process. So, we have not changed our rescission practices. And, we just keep monitoring those and reviewing them as need be.

We'll, I guess the question was, is there additional evidence that comes to light during -- if some of these foreclosures get litigated that could bias your rescissions higher? Or, is that already factored into your reserving methodology, as you suspect?

The rescission issue is more of what happened at origination versus the foreclosure issue, which is more of a servicing back-end issue.

Agreed. But, I assume also some (Inaudible) warranty, or some underwriting issues came -- arise -- from the litigation process?

Yes.

Okay.

Yes. Steve, we really don't know what will come of this. Your question is one that yes, possibly you could learn something more that would help you with that situation. Through this process, you may also have some borrowers, where you may find you can do modifications, where they're proceeding down that. Frankly, from our position as we said, I don't think it is material relative to the Company. There may be some of these that are found on an individual basis. But, I don't think it is material.

Okay.

And, then when it comes to the settlement agreements with the lenders, can you give us a little bit of update on the discussions you're having with the GSEs. And, their thought process on those settlement agreements? Well, there -- overall relative to the settlement agreements there are other lenders that are looking to do something similar. And, certainly within our industry, I think our -- the mortgage insurers are looking to provide these also, to the extent that they're fair to all parties and reduce a lot of work that's been involved in these investigations. The GSEs have rightly looked into these and would like to know more regarding these settlements. And, we're at that stage with them, that they're trying to learn more regarding them.

Okay, great. And, just last question guys. Average claim rate is down roughly nicely in the quarter. Anything driving that other than mix?

You're talking about the average case basis, that number?

Yes.

I would say the rate -- claim rate was up modestly in the quarter. What's happened over time is that the severity has decreased quarter to quarter over the last four quarters. And, I think you see that in the average severity claim. You see it in the mix of bulk versus flow. And, as well in the queue you will see the percent of the high dollar markets have declined modestly quarter to quarter, too. So, it is really more of a function of mix. So, I would say claim rates were up modestly in the quarter, or I say flat really for the second quarter -- up year to year. But severity is then down the last couple quarters.

Reflecting the mix, basically as you asked.

Yes. Great. Thanks guys. And, congratulations on a good quarter.

Yes.

Our next question comes from Mike Rendell.

Yes, a couple questions quys. Curt, the quarter seemed pretty solid. And, when you guys, reported June and July, you had some very cautious comments about the second half of the year. In your view, what was better in the third quarter?

Well, from a new business standpoint, obviously it increased volume. But, Mike, with the change in the FHA premium rates, which are taking place -- or took place this month. And, then you layer on our credit tier pricing, I feel much better about new business written going forward. The credit quality still continues to be outstanding relative to the business we're insuring. And, we see that by the mix on both FICO scores and LTVs and other indicators. Every month that we go along, I think there is more stabilization happening on the loss side also, Mike. So, we feel better about what we see happening, I think, on the loss side, also.

Okay. Good. And, then in your disclosures, I think you mentioned 19,800 delinquent loans that were in a HAMP trial. But, they hadn't been reported to MGIC yet. How are you -- ?

No, Mike.

They've been reported.

There is 19,800 trials that have been reported to us, so they're still active in the trial status.

Okay. And, you have recognized those, then?

Well we've recognized they're in trial status but they're not cured.

They're not in our cures at all yet, Mike. Those are -- What do they run? Probably 30% to 40% of the loans in trial, actually result in cures.

(Inaudible) Right, on the total. Right.

So historically, so that is kind of the pool as we said. The pool of HAMP modifications is dwindling. And, you're down to less than 20,000 that are reported to us. That is your total pool left, and out of that historically 30% to 40% have actually cured. So, that would be the remaining number you'd think you would get out of HAMP going forward. Now, as I said also, though, the private alternatives or the non-government programs are kicking up on modifications nicely. And, so, as people that don't pass the HAMP test, they're being modified in other ways through the GSEs and other programs.

Good. That's good to hear. That number was growing. And, then just lastly, your bond portfolio now has a nice gain in it. It looks like about $280 million. Do you have a strategy for harvesting some of that gain? Or, how do you think about it?

Well, we have been. But, fundamentally what we're doing is looking at every investment on a daily basis. And, looking at what the alternatives are. Do we take the gain? And, then what's available with respect to interest income? And, for the most part, we've been better off, if you will, harvesting on a limited basis month -- quarter to quarter than taking the entire portfolio a year ago and trading it. So, I think it is all a function of what's available in the marketplace relative to yield and what's the alternative for us vis-a-vis the current investment. So, if you wanted -- some people have recommended to me that I sell everything, take the gain a year ago. I think we have proved to be better off, if you will, trading on a day-to-day basis. And, maintaining the maximum yield we can get, as well as, maximizing some of the benefits from the MUNIs. So, it has worked out pretty good to date. So, we've been trading it. We have been trading it daily. But, not all in one transaction.

Got you. Okay. Thanks and congratulations guys.

Thanks, Mike.

Our next question comes from Scott Frost. Please go ahead.

Yes. I just wanted to touch on putbacks again briefly. Just a general question. If a mortgage is put back to an originator due to an RNW breach, would that void an MI policy if it had been written on the loan?

Not necessarily, Scott. There is two different contracts and two different applications.

Okay. So, we can't really say -- this is why you're not -- you're saying the putback issue, not the foreclosure moratorium. But, the putback issue you're saying not a lot of effect on reserves? You expect also because that has to come after a foreclosure notice anyway. Is that the right way to think about it? You're saying not that meaningful to you?

It sounds -- to me, anyway, you might be mixing a couple of things here.

I might be.

Rescissions, we are still have into our losses incurred. Are still affecting our losses incurred.

Right.

We see that portion declining modestly over time. What we're saying is relative to GSE and other people who are repurchasing loans, that's a separate action by them but not by us.

Right. Right.

The foreclosure moratorium doesn't -- we're saying the foreclosure issues that have come to light over the last few weeks, we don't expect to have any significant or material impact to us.

Let me maybe, put it another way. If a loan is made with over 80% LTV, you can make it conforming by buying private mortgage insurance, right?

Yes.

Okay. If a loan like that is put back to an originator, because of a rep and warranty breach, faulty appraisal, whatever, bad income whatever. Does that mean your policy is no longer valid, if the originator wants to come to you for a claim?

Well, generally we're probably the one that found that, and put it back to them.

Okay.

Put it back to the GSEs who then would put it back, if you will, to the originators. So, I am not quite sure I am following, but I think we're generally the source on the above 80 of finding the fraud and misrepresentation that you saw.

Got you. Okay. All right. My misunderstanding .

You bet.

Our next question comes from Mike Grasher. Please go ahead.

Thank you. Good morning, everyone. On the premium yield it's bouncing around here a little bit. When can we anticipate that sort of stabilizing and at what level?

Mike, it's Mike again. I guess I would contend it is fairly stable. It moved a few tenths of a basis point. But, that's going to be I would say right in this range right now.

Until we see some appreciable change in volume as Curt talked about, you probably won't see that move much. Until, we start to get back to some of the normal levels of NIW.

Okay, fair enough. And, then I guess, anecdotally, have you seen a change in claim levels over the past couple of weeks?

There is more claims -- we're receiving more claims month to month, so we're in an upward trend there. And, that is a function of the inventory working through the various moratorium and foreclosure proceedings and completing the claim to us. And, those claims are being submitted to us. So, we have seen them rise month to month for the last four, five, six months. And, that's going to lead to paids increasing month to month as we spoke, -- Curt mentioned earlier. And, the paids in the fourth quarter aren't going to be impacted by the foreclosure moratoriums and issues as of late, because the claims we're going to pay are either here or nearly here.

Okay, fair enough.

And, we've completed our rescission work on those.

And, for the month of October it is just too early. We haven't had that many business days to really make any -- to give you anything meaningful there.

Okay, fair enough. And, assuming everything gets worked out around the moratorium, can we expect guidance around 2011 paids. I guess, in fourth quarter results?

Yes.

And, then just in regard to investment yields, Mike, does this look to be sort of the bottom in terms of the yield on the portfolio?

Well, I guess, that would be a function of again of what happens in the marketplace. And, how aggressive we are with respect to sales. It has trended down. And, the opportunity, here as you know, in the marketplace is not much -- the other thing we have shortened the duration, obviously, to match up with the demands on claim payments over the foreseeable future. So, duration is shorter, and our investment yield opportunities then are limited. So it is just a function of what's available in the marketplace. But, it's probably here or slightly lower as we go forward, because we're continuing to shorten the duration.

I would guess it is difficult to get the duration much shorter than where you are right now. Would that be fair?

Close, yes.

Okay. Thanks very much.

Yes.

Our next question comes from Douglas Harter. Please go ahead.

Thanks. I was wondering if you could talk about conversations you're having with the originators on new business since the FHA pricing increased?

Well, I know our sales group has been very active relative to both meeting in person -- And,I know we host a lot of webinars that hundreds of originators are online at once relative to the pricing advantage. Relative to mortgage insurance, now on a monthly basis, there has always been the case that on a total basis we're a better execution. But, now on those that I discussed earlier, -- the 90% loans with 680 and higher FICO scores and 95% loans with 720 plus, we're a better execution on a monthly basis. So, we are making that known to everyone, both through our web presence, as well as, our sales and underwriting presence with our people. And, I think it is -- Everyone is looking for the best execution relative to competing and on the origination basis. So, ultimately that's where things flow to. And, so we're excited about the new opportunities that we have with FHA. The thing that we have to deal with, that we had talked about prior, is that the 3.5% down payment loan is popular with the FHA program and we're more at the 5% minimum down. And, so we have to make the case to borrowers on why it is in their interest to put another 1.5% down. And, I think when you look at the financial execution, if you can do that you would do that as a borrower. So, we're making that case known throughout the origination network, as are all of our competitors within our industry. And, if you've read, I think also, the consumer press is writing about it also. I think people are well aware of the change.

Great. Thank you.

Our next question comes from Mark [Debrie]. Please go ahead.

Yes, thanks. Just quickly on your -- the three quarter trends on new notices. Would you attribute most of the increase on a quarter over quarter basis to just seasonal trends? Or, is there anything else there?

Mostly quarter to quarter I would say is due to the seasonal patterns.

Okay, great. Are there any additional agreements that you came to during the quarter with originators around rescissions, similar to the one you disclosed last quarter?

No.

No. Okay. Any expectations for more? Or, are those conversations not going very far at this point?

Well, I mean, there is a number of people that are interested in those discussions. So, whether they come to finality or not, I don't know. But,that certainly is a topic of interest.

Okay. Thank you.

Our next question comes from Nate Otis. Please go ahead.

Good morning. Just following up on that new notice question. Any way you could assess where we are currently versus where you thought we would be starting out 2010? Are we kind of a little better, a little worse, in line with what you thought when you started out this year?

At the beginning of the year, I don't think we had as much benefit of HAMP baked in, because we hadn't seen it until the first quarter. So, with regard to HAMP, we're better off. New notice activity. I think in line, to maybe a little better than what we thought. And, cure activity in line, to maybe a tad worse given we thought the recovery in the employment and housing prices would be a little better than what we've seen.

Alright, fair enough. And, then you certainly talked a lot about the foreclosure moratorium component to this. Any thoughts on the impact, though temporary, on delinquencies to start the fourth quarter. How it might kind of change things a little bit? And, whether it be positive or negative, how you are looking at things not necessarily certainly from a paid standpoint, but from a delinquency standpoint in the quarter?

I don't think it will have any impact on delinquencies.

New delinquencies.

Yes, I mean on new delinquencies.

Now, if a foreclosure issue leads to a little longer time to get the foreclosure completed and the claim to us and the claim paid. That may cause our delinquent inventory to be slightly higher than what we thought. But ,that's more of a timing issue.

Yes, that was it, more of the delinquency bucket, not necessarily new delinquencies.

Okay.

And, then just lastly, could you just quickly go through that IRS settlement a little bit more in depth?

Not more than we have already indicated. We have reached agreement with them, and we're waiting for the final documents and the -- we did book an adjustment in the third quarter. And, we believe we've got that properly stated. And, other than indicate that we have reached agreement with them, and we're just waiting for the final documents.

Okay, fair enough. Thank you.

Thank you.

You bet.

Our next question comes from Donna Halverstadt. Please go ahead.

Hello. My question had actually been on the IRS settlement but in a qualitative way. You didn't quantify the adjustment. Can you at least tell us if that adjustment or the settlement will be material? Or, is material in the context of your financial statements or with respect to your anticipated uses of [holdco] cash?

There is no use of [holdco] cash in that settlement. It is a writing company issue, Donna. And, the adjustment in the quarter that we booked, I believe, was less than $5 million or approximately $5 million.

Super. Thank you.

Our next question comes from Chris Owen. Please go ahead with your question.

Good morning.

Good morning.

My question is how many private mods do you currently have in your delinquency pipeline?

Chris, this is Mike Zimmerman. The reporting on HAMP is spotty, and it is even worse, I will say on the privates. We get what we get from certain (Inaudible) but not everybody. So relative to trials -- not HAMP, we just don't have a good handle on that. We get them as a cure.

Okay. And, then my other question was did the twelve-month plus missed payments bucket increase this quarter? And if so, was it a similar increase to last quarter?

It is up -- I believe it is up. It was 121,000 the second quarter. It is 123,000 this quarter. So not significant, but it is up.

Would you expect that to start going down as you're paying out more claims in the next couple quarters?

I believe it will be a function of -- remember, it is also a function of I guess you could talk about the pure size of the number or the percent. Are you talking about both?

I was talking about pure size and absolute number.

Well, I think it will depend again right now, as Larry just indicated, we're in this moratorium thing. So, that may have an effect on it. Some of the older issues may have to stay longer until some -- so I don't think we can tell yet ,until we get through the fourth quarter and understand a little bit more what impact the moratorium will have on some of the older delinquencies. At some point, it should peak.

But, I would say, we think paids are going to increase here, at least in the short-term. And, if that is true, then I would think that bucket above 12 would continue to grow until such time as we think paids have peaked.

Well, if paids are increasing, wouldn't that be draining that bucket?

Yes, but, more are going in, and that's why we're paying more. So, at some point when we think we're close to plateauing, I would say then that bucket would probably peak.

Okay. And, then just sort of qualitatively, 2011, obviously fourth quarter is difficult seasonally. But, if we sort of -- if you expect NODs to decrease between now and year-end. And, then typically there is favorable seasonality in the first two quarters. What does that look like? You're projecting an annual loss. Would you expect those quarters to be profitable? Or, can you frame that for me?

We'll give you an update on that in January.

Alright, fair enough.

But, also for those (Inaudible) and everybody, we don't do quarterly forecasts. And, we're, as we said in our factors there's a lot of volatility in a lot of functions that is go into those forecasts. So, it is pretty difficult. But, you probably wouldn't be hearing quarterly income forecasts from us either.

Okay. Thank you.

You bet.

Our next question comes from Matthew Howlett. Please go ahead with your question.

Hello guys, thanks for taking my questions. Have you updated your cumulative paid loss guidance that you gave with the April capital raise? Given, I think you said HAMP is working better than you thought offset by lower natural cures?

No. Matt, we have not updated that yet, no.

Okay. And, then just on the mod -- the alternative mod cures that were up and the HAMP cures. Are you seeing more late stage cures on mods? Given the alternative mods theoretically would have been delinquencies, which failed HAMP trials. Has there been any sort of improvement? And, I think you also said that you didn't think the remaining HAMP trials would really get pulled through in terms of cures?

That's right. The last quarter I think our average age of a modification was around somewhere between eight and nine months, and I don't think it has changed materially this quarter. And, not all of the HAMP mods necessarily are failed. They maybe four or five months old, but they run the test. If they don't pass that income test of 31%, it is right out of the chute. So, it goes into these alternative programs. So, we haven't see much change in the average age of the modification. And, relative to the remaining trials, I think you're right. I think you need to think about the total that we've started ever to date which is around 66,000, 68,000, and that's where we expect 30% to 40% of that to ultimately cure.

Got you. And, just looking at the average reserve per delinquency going further. It obviously went down. Is that just a function of paying out stuff? Or, is it just a function of getting more cures in the later stage delinquent buckets?

As I said earlier, it is more of a function of what is happened to severities over the last few sequential quarters. The severity has been down. The mix has been different bulk versus flow has continued to decline. There is some of the larger state mix has changed in this last quarter and the previous quarter. So, there has been a continual change, if you will, a trend of lower severity over the last several quarters, as a function of the mix of the notices, bulk versus flow, as well as geography and then underlying cover. So, it has primarily been not a factor in claim rate, but rather severity.

Got you. Okay, fair enough. And, then just last question, HARP financing. They were up pretty substantially. What's going on there? And, then have you done any FHA short refinancing with your current delinquent -- your current portfolio? Thank you.

The FHA short refinancing, no. That requires the lender to take a loss and by forgiving principle. And, you just haven't seen much of that take place at all. At least that we're aware of. And, then relative to HARP, yes, that is picking up despite some of the loan price adjustments that take place. But , as rates keep trending lower, more borrowers are being able to take advantage of the low rates up to that

Great. Thanks guys.

Thank you.

Our next question comes from Jordan Hymowitz. Please go ahead.

Thanks for taking my question. Two things. When you said paids were likely to be up in the fourth quarter, are incurreds also likely to be up? Or, are you not commenting on that at this point?

Well, we wouldn't comment, but, Jordan, this is Mike again. That would be again a function driven a lot by notice inventory levels, as well as, mix. But, we could have an increase in paids and not an increase in incurreds. It would be a function of what notice levels are at the end of the year. But, we do know because of the inventory that we have and the claims received. We're anticipating higher paids in the fourth quarter.

And, the 21,000 claims that you have in inventory at this point. How many quarters should we take -- to think to run through that?

As you can see from the supplement, usually after two quarters you have 90% completed, so nine months roughly.

Okay. And, final question is -- I'm confused, you said we may incur annual losses in the future. Are you telecasting that next year is going to be a loss? Are you saying there's a possibility of a loss? I am kind of confused on the wording.

We're saying the possibility of a loss. Again, as you remember, a significant element here is the level of delinquencies. And, until we continue to see more visibility on the economy improving, level of delinquencies significantly decreasing, that's a big factor.

Okay. Thank you.

Thanks, Jordan.

Our next question comes from Edwin Groshans. Please go ahead.

Good morning, gentlemen. Thank you for taking my call -- my question here. So recently, you got a lot of headlines on foreclosures, and it seems to be stealing the show. But, in the background there is also talk about putbacks. And, it seems that the putbacks could be more relevant to your business model. Could you kind of walk us through when you get the putbacks? Or, when the putbacks are put back to the originator? How that influences your business model, especially if you made a claim on one of those loans?

Ed, again maybe we've got -- talking about two different processes here. We have a process that we review claims as they come in for fraud and misrepresentation. Make sure that they're valid claims. If they aren't, we'll rescind that coverage. That will cause a repurchase by the GSEs. If the GSEs are looking at loans that don't have -- and that's been primarily where a lot of the repurchases to date probably have come from for the GSEs. As they do increased repurchases, these home loans may not have mortgage insurance on them. So, we're going to review -- continue to review claims as they come in and generate through. If there is a repurchase on a loan, we're obviously trying to talk with the GSEs and coordinate activity. But, typically it happens at foreclosure time.

Right. I guess, I --

And, we're at the front end of that process, I think, as I talked about earlier. I mean doing that work, and we do a thorough investigation on all of our claims. So, again we're generally the source of that putback, given that we found broader misrepresentation within the file and have canceled our mortgage insurance. And, as a result of that, the GSEs have a reason to put it back to the originator.

And, then how does that work on the private label side cause that seems to be the issue now with the foreclosure -- whether people have title and things along those lines. And, concerns that it could be heightened putback ---

Ed, it works the same from our process. If the claim is not valid, then we'll deny or rescind the coverage whether it is GSE, private investor, private label, through the primary channels. It is the same process.

Okay. And then, I don't know if you have looked at this at all, but the FHA has done what they're calling the short re-fi program. Is there anything from your end that you could do to try to encourage borrowers to take that up? Because it seems like that would be a big benefit for MGIC here.

As I stated earlier, unless the lender is willing to forgive that principle balance to allow the short re-fi to take place. There is not a whole lot that we can do to incent them to take that loss.

Okay. Great. Thank you for your time. Have a good day.

Thanks, Ed.

I am not showing any other questions in the queue at this time, gentlemen.

Okay. Thanks, Sean. And, thank you all for being part of our earnings call, and have a wonderful day. Thank you.

Thank you, ladies and gentlemen. Thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.