Radian Group Inc (RDN) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Radian's second-quarter earnings call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Emily Riley, Vice President of Financial Communications. Please go ahead.

Thank you and welcome to Radian's second-quarter 2010 conference call. Our press release, which contains Radian's financial results for the quarter, was issued earlier today and is now posted to the investors section of our website at www.Radian.biz.

During today's call, you will hear from S.A. Ibrahim, Radian's Chief Executive Officer, and Bob Quint, Chief Financial Officer. Also on hand for the Q&A portion of the call are Teresa Bryce, President of Radian Guaranty; Dave Beidler, President of Radian Asset Assurance; and Scott Theobald, Executive Vice President and Chief Risk Officer of Radian Guaranty.

Before we begin, I would like to remind you that comments made during this call will include forward-looking statements. These statements are based on current expectations, estimates, projections, and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially. For a discussion of these risks, please review the cautionary statements regarding forward-looking statements included in our earnings release and the risk factors including in our first-quarter 2010 Form 10-Q. These are also available on our website.

Now, I would like to turn the call over to S.A.

Thank you, Emily, and thank you all for your interest in Radian. As we do each quarter, I will provide highlights of our quarterly performance and also offer insight into the trends affecting our business. Bob will then cover the details of our financial position before we open the call to your questions.

Earlier today, we reported a second-quarter net loss of $475.1 million, or $4.31 per share, compared to net income of $231.9 million, or $2.82 per share, for the same period last year.

Before we move forward, I'd like to address three important points. First, it must be noted that our second-quarter results were primarily driven by the accounting impact of fair value adjustments in the quarter, which included a pretax loss of $525 million. We mentioned this as a possibility on the last earnings call. This loss on derivatives resulted mainly from an improved market perception of Radian's credit risk that significantly tightened our credit spreads and from the widening of general corporate credit spreads.

Bob will provide more details and direct you to helpful disclosures in our slides. However, it is important to note that this GAAP loss does not impact our statutory capital, although it does impact our GAAP book value.

Second is the modest increase in our mortgage insurance reserves. Undoubtedly, we are extremely encouraged by the second consecutive quarterly decline in delinquencies and believe that this trend has positive implications for us in the future.

However, our reserves are driven by several factors, including the composition of our delinquency portfolio, in particular the continued historically unprecedented aging of delinquent loans due to trial modifications and foreclosure moratoriums. While these other factors offset the positive [deport] trend in our reserve estimate, Radian now has even stronger MI reserves as we continue to deal with near-term economic uncertainties in terms of employment and home prices.

It is also important to note that the actual trend in our claims paid remains in line with our previous guidance.

Third, there are several positive results and developments in the second quarter, including signs of credit stabilization in both our businesses and an increase in our new insurance written. We believe these positive factors are far more important than short-term effects that cause volatility in our results and are integral to Radian's future success and growth.

Moving on to a few highlights from the quarter, we continued to benefit from our non-mortgage insurance businesses that contributed to strengthening our mortgage insurance business. Radian Asset paid a dividend to Radian Guaranty of approximately $69 million in June, and we finalized the sale of our equity interest in Sherman Financial in the quarter.

We expect Radian Asset to continue to provide important capital support for our core mortgage insurance franchise, and it's important to note that, absent the substantial fair-value impact, our financial guaranty business broke even in the quarter, in spite of a continuing challenging environment for the financial guaranty industry.

The risk-to-capital ratio for Radian Guaranty was 17.9 to 1 on June 30, 2010. This compares to a ratio of 16.9 to 1 in the first quarter of this year and 15.9 to 1 a year ago. We are comfortable that we have the capital and capacity we need to write more high-quality mortgage insurance business and the ability to make further contributions to our MI capital from the substantial capital and liquidity resources of the Company.

In the recent past, as mortgage insurance industry tightens underwriting and pulls back from the market as a result of capital constraints, the mortgage insurance -- the mortgage industry shifted to writing more business with FHA than private MI. Our goal is to bring that share back to the private MI industry and to Radian. And we are seeing early signs of progress, including an increase in new insurance written across the industry and a slow but steady decline in FHA business since February.

In order to help our lending partners compare FHA mortgage insurance to competitive Radian products with potentially lower payments and tax advantages for the borrowers, we have launched our marketing campaign and created a dedicated website at Radianisready.com that features online tools, calculators, and product comparisons that are easy to use, and we are offering our lenders free product training as well.

Perhaps most importantly, we believe the FHA is beginning to implement the changes we have been anticipating in terms of reducing their risk and tightening their guidelines. In fact, the U.S. House of Representatives passed a bill last Friday to provide the FHA with the ability to raise the premiums it charges to borrowers by as much as threefold. The legislation designed to decrease FHA's risk and stabilize its financial position has been in development and discussion for months. While the exact timing for FHA reform passage and implementation remains uncertain, we believe that progress is being made and that the changes to FHA will make our product even more attractive.

Also along these lines, we are encouraged that the new financial reform legislation specifically lists private MI as a factor to be considered by regulators in defining the qualified mortgage exemption, and hope that this will help maintain a level playing field for our industry as we compete against FHA.

We are encouraged by a 4% decline in delinquencies in the quarter, which was the second consecutive quarterly decline. There was also a drop in the number of new versus repeat delinquencies, which is a positive trend for our business and confirms the credit burnout in the most troubled vintages and products. You can see this detail in our default roll-forward charge on slide 16 of our webcast presentation. It is additionally encouraging that July delinquencies also declined slightly, representing seven straight months of declines.

New insurance written grew from $1.9 billion in the first quarter to $2.7 billion this quarter. And our new business, again, consisted of loans with excellent credit characteristics. We've continued to maintain a strong share of this high-quality business with 21% market share in the quarter, which is significantly higher than our historical levels of 12% to 15%.

Turning to loan modifications, as of June 30, 2010, approximately 15,000 Radian-insured primary loans were in a HAMP trial period, representing approximately 11% of primary delinquencies. Nearly 13,000 Radian-insured loans had completed the program as of the end of the second quarter, and nearly 25% of cures were the result of completed loan modifications, including HAMP. Many lenders and servicers have their own modification programs, and when combined, these private programs may exceed the HAMP numbers.

Now, before I turn it over to Bob, it is important to recognize several examples of Radian's financial strength and prospects for future growth. First, Radian's book value at June 30, 2010, was $13.40 per share and our investment portfolio remains strong at $6.6 billion.

Second, we believe that our existing book of business as of June 30, 2010, contains an embedded value of $1.1 billion on our first-lien domestic portfolio, as shown on slide 11.

Third, Radian's risk to capital ratio was 17.9 to 1, with the ability to contribute more capital to Radian Guaranty from the substantial cash available at the holding company. We continue to write high-quality new MI business and our NIW increased in the quarter.

And finally, we are pleased with the signs of credit trend stabilization in our businesses, including certain areas of the financial guaranty portfolio and the continued declines in mortgage insurance delinquencies. We believe that these trends are integral to Radian's future success.

And now, I'd like to turn the call over to Bob for details of our financial position.

Thank you, S.A. I'll be updating you on the P&L activity and trends for the second quarter of 2010 and our financial position as of June 30, 2010.

The MI provision for losses was $428 million this quarter, down substantially from last quarter but still at an elevated level. Delinquencies came down more than we expected; however, the impact on the incurred losses was offset by a variety of factors, including a reduction in our estimate of future rescissions and denials, a continued aging of our delinquency inventory, and incremental pool insurance structured transactions breaching their subordination level, which is added to the number of pool delinquencies that have loss reserves.

Please keep in mind that we continually update all the components of our loss reserves estimate in what is still an unprecedented environment, and because our reserve balance is so large, small percentage changes in any factor can have a large proportional impact on our P&L in any given quarter.

Our delinquent loans are highly concentrated in late-stage buckets, as is depicted on webcast slide number 15. Almost 45% of our delinquent loans are greater than one year past due, and these loans constitute a disproportionately higher share of our loss reserve. Our reserve estimate assumes that some of these late-stage delinquencies will cure, although this outcome is uncertain. Because of foreclosure moratoriums, modification efforts, and backlog, the resolution of these loans has been very slow and will likely continue to be slow. Because of modification efforts and strategic defaults, many loans that we have expected to cure are still delinquent and their ultimate outcome is still uncertain.

Importantly, the trend of new delinquencies is positive.

As was the case last quarter, losses in two of our small mortgage insurance subsidiaries that solely reinsure pool insurance, which has absorbed a disproportionate share of incurred losses in the first six months of 2010 and deepcover risks from Radian Guaranty, have required us to provide these companies with additional capital in order to maintain their requisite amount of statutory surplus. $67 million of the necessary contribution of $72 million this quarter came from Radian Group. Based on our projections, we do not believe these companies will need material amounts of contributions in the future.

The dollar amount of loss avoided related to denials and rescissions in the second quarter of 2010 was approximately $203 million, compared to $277 million in the first quarter of 2010. This reduction is due to increasing numbers of rebuttals, which have protracted the rescission process.

Claims paid for the quarter were approximately $337 million, and we are reiterating our claims paid guidance for the year 2010 of approximately $1.5 billion.

As we said was a strong possibility on our first-quarter call, change in fair value line and net loss on other financial instruments line were impacted significantly this quarter by a tightening of Radian's credit spread. This, coupled with a widening of general corporate credit spreads, drove our fair value loss for the quarter of $525 million. Another $66 million of fair-value loss is included within the loss on other financial instruments line, which also contains other positive items that offset such unrealized losses.

With the large additional unrealized loss book this quarter, the total of our June 30, 2010, balance sheet amounts related to our derivative exposures and consolidated transactions was a net GAAP liability of approximately $1.1 billion. This liability relates to our CDO of ABS, NIMS, and TruPs, as well as our corporate and other CDO exposures.

In contrast, and as outlined on webcast slide number 18, we have estimated the net present value of future credit loss payments at $678 million, leaving an approximate gap of $454 million that would be recognized into income over time absent any additional credit loss payments. That differential represents over $2.00 of after-tax book value.

In calculating the net present value, we use an approximate discount rate of 3%, which mirrors our investment rating. Using a higher discount rate that is more comparable with historical investment rates would reduce the expected loss significantly, as much of the expected credit loss payments consist of our CDO of ABS exposure, the principal losses for which we would expect to occur in 2006 -- in 36 or later.

In financial guaranty, there appears to be some signs of stabilization with regard to certain credit trends, including within our TruP CDO portfolio. While our public finance portfolio continues to reflect the stress from general economic difficulties, deterioration in this portfolio has been relatively modest.

With regard to the CDO of ABS transactions, we continue to believe that we will not be required to pay principal until sometime between 2036 and 2046, and that the ultimate principal payment will likely be a significant portion of our total par exposure of approximately $460 million. Based on our updated cash flow projections, which showed some slight improvement, we expect to begin paying claims for interest advances sometime early in 2012, but this could be earlier if credit deterioration is worse than projected.

Updated details of our TruPs exposure is presented on webcast slide number 27, with no significant changes from our first quarter update. Details of our CDO of CMBS exposure is on webcast slide number 26, with some further collateral deterioration and heightened surveillance but no expected material future credit losses.

On the last day of June, we paid a dividend from Radian Asset to Radian Guaranty of just over $69 million. Our preliminary estimate of potential dividends for 2011 is $60 million.

Expenses this quarter were significantly reduced by approximately $50 million in variable compensation expenses resulting from a decline in Radian's stock price during the quarter. While we are required to accrue this expense on a periodic basis, based on our stock price at the time, the ultimate payout of this compensation is uncertain and in some cases will not be made for a number of years. The appropriate expense run rate is better measured by looking at our six-month expenses, rather than either of the individual quarters.

We raised $526 million in May and we have contributed $100 million to Radian Guaranty during the second quarter and $67 million to our MI subsidiaries subsequently. We had substantial remaining flexibility to support Radian Guaranty and the other MI sub capital position, if necessary, or to address holding company cash needs, if necessary. Our holding company cash resources, after subtracting the recent MI capital contributions and the expected intercompany tax payments through 2011, and adding the amounts we can redeem from our CPS security, is approximately $580 million.

While our investment portfolio increased significantly this quarter, due to our capital raise and due to the sale of Sherman Financial for cash, we had $661 million of securities purchased at quarter end that hadn't settled yet. Therefore, both assets and liabilities contained that amount at quarter end that was reduced in early July when the securities settled.

We would now like to turn the call back over to the operator for questions.

(Operator Instructions). Mike Grasher, Piper Jaffray & Co..

Bob, I wanted to go back to the slide that you referenced, slide 15, the primary loans in default, and just seeing the duration that some of these are sitting at. Did you break out or can you break out where or what percent of each of these buckets, maybe, are impacted by modifications?

Mike, we haven't done that, and I know earlier on we were saying that most of the modifications had come from the earlier bucket. I think that's changed somewhat and we are seeing some of the modifications coming from the later buckets more recently.

And I guess where I'm going with this, if those that are 12 payments or more, 45%, for those not in the mod program -- or do you have a number for what those would be in the mod program, but for those not in the mod program, would you expect those to be sort of heading to foreclosure over the next 12 months?

Certainly a lot of the older loans will be headed to foreclosure, and we've estimated for that within our reserve. There are also a significant amount within the modification programs, both HAMP and the servicer program, and mods that complete out of those programs would cure out of those older buckets.

I think it would be fair to just to add -- this is Teresa -- that we are seeing the mods come sort of across the board, if you will, in all of the buckets, but the majority of them are still coming from kind of some of the later, older buckets.

Okay, so the majority out of the later buckets. Okay. Appreciate that, and then, Bob, just one other housekeeping item. The operating expenses looked a bit lower than what we were modeling, here anyhow. Just curious if this is a fair run rate going forward?

Yes, I think the six months is a fair run rate, Mike. The same thing that impacted expenses up in the first quarter impacted them down in the second quarter, and that's the variable comp that is tied to stock price. So, if you look at the six months, I think that represents a fair run rate.

Matthew Howlett, Macquarie Research Equities.

Bob and S.A., just on the paid claims guidance, you reaffirmed it, the $1.5 billion. To get there, you need to see essentially a doubling of paid claims the next two quarters. Is there anything that you're seeing in July that would suggest you're going to hit that run rate or are you just sort of looking at roll rates and figuring that a certain amount were going to have to go to claim by the end of the year?

I think it's more the latter, although the actual claims paid have -- through the quarter, they have increased. So, we are seeing that happen. We've been expecting it to happen. But it's still -- at this point, it's still projection of claims that we're going to receive.

So I'd say half of it is because we know we're going to be paying more, and we have been paying more, and the other half is really a projection that we are -- we feel like claims will be going up. Obviously, the reserves have come up so much in the past couple of years that that's going to be paid out over the next couple of years.

And just on top of that, there's no way of knowing what percentage of those delinquencies are in mod programs outside of HAMP? Because the Treasury reports on the HAMP program, they always point to less than 2% that fail HAMP trials are going to actual foreclosure sale, or resolve that way. Is there any way to guess what percent are in some alternative program outside of HAMP?

This is Teresa again, and the date on that really just isn't very robust, so we've had difficulty not always being able to tell, and so sometimes when even things are shown as HAMP cancellations, they could've moved over. I think what we are starting to see is more mods being completed outside of HAMP rather than within HAMP, and we're also seeing sort of industry reports overall that would say that there is a trend towards even some of the HAMP mods that have started out in a trial mod with HAMP moving over to kind of a private completion.

And then, I guess just a broader question. You're still maintaining, really, a deep profitability on the first-lien book of business. At what point do you think you're going to -- to get to that $1.1 billion, you'll have to turn profitable at some point soon. Any type of clarity on when that's going to be, when you're going to turn the corner and start to capture -- seeing that those results flow to the bottom line?

Just based on the questions that have been -- that were asked so far, they highlight the amount of uncertainty we are dealing with, particularly in terms of the build-up of inventory in our default buckets, and that complicates our ability to see forward.

Hopefully as that resolves itself, we will have more clarity. However, we are encouraged by the fact that, that uncertainty notwithstanding, we still have an embedded value of $1.1 billion, which suggests at some point embedded in that is the assumption at some point we should return to profitability.

Bill Clark, Keefe, Bruyette & Woods.

Actually, this is Nat Otis for Bill. Just a couple of quick questions. First one, any color on the deferred tax asset and how this quarter impacts anything going forward on when you might be able to realize anything?

Yes, we evaluate the deferred tax asset every quarter and we have not taken substantial evaluation allowance against it, so we are still confident that it's a good asset. Obviously, the profit that we generate in the future will turn that around. Some of it is caused by the unrealized loss on the fair value, so that will impact it as well.

Fair enough. And then, you gave some color on the pool insurance breaching of the subordination and how that impacted reserving. Any way you could give any color on the other components and whether it was kind of the reserving this quarter had to do with the actual mix shift in the quarter, or was it more a change in your expectations going forward than impacting reserving?

I think the impact was -- obviously, there are a lot of factors that go into it, but the impact in order was the order that I went through. So, the primary impact or the most impact was from the change in estimate on rescissions and denials, then the composition or the aging of the delinquency inventory, and then the pool deals breaching subordination, all of those contributed, in that order.

Mike Grondahl, Northland Securities.

Bob, the first one is really on the reserve and the provisioning. I know in the first quarter, you kind of adjusted it, and in the second quarter you adjusted it again, and you just kind of explained it was for fraud rescissions and some pool stuff and the aging in the middle. If there's going to need to be an adjustment going forward, what factors would be most likely to cause that, in your opinion?

Mike, we adjust every quarter. Obviously, we -- there are a whole host of components to it and we revise our estimate every quarter on each of them.

You know, rescissions and denials are a big component of the number. We are confident in our estimate, but that doesn't mean it can't change over time. But certainly that's one that is important.

Roll rates to claim, a very key component. Those are revised every quarter. Severity is a key component; that is revised every quarter. So, I think we do our best to estimate what is a very difficult number to estimate, and every quarter there are going to be changes that -- on such a large number, small percentage changes do impact any individual quarter's numbers.

Maybe the next one for S.A. S.A., if the Senate does pass this FHA price increase bill over the next couple weeks, how long do you think it takes for the FHA to actually raise prices?

My impression from talking with the FHA is they have been waiting eagerly for the passage of this, and that suggests, and I'm speculating here, that they may actually have strategies in mind to implement.

But other than just speculating on it, I don't know how fast it will take them to move on the pricing front.

We are, however, continuing to work on several fronts to gain share back from the FHA. We are in a world where the market dynamic is such that, while in a normal world we worry more about our other MI competitors, in this environment we are more focused and more worried about how to get share back from the FHA. And I will ask Teresa if she has any more insights on that.

I would just reiterate the fact that we launched a marketing campaign focused on this issue, partially to make sure that lenders understood that we were ready to write more business and that we were focused on writing more business, but also to help them understand how the execution for the borrower compares and that there are products in the private MI sector that are favorable for the borrower.

And so, we've given them online tools and calculators that help them with that. We've also tried to make sure that those are tools that can easily be used by loan officers where often that decision is made about FHA versus private MI, and we are continuing to look for opportunities to sort of expand the -- our reach into competing with FHA.

But I would just add to S.A.'s initial comment that we certainly view a price increase by FHA as a positive and we would hope that that would be shortly forthcoming.

And then, maybe just a quick follow-up for Bob. Can you quantify how much new delinquents dropped in July?

We don't have the components, Mike. The number that we said was that the net delinquency level declined slightly. But we don't have the components.

Mark DeVries, Barclays Capital.

Could you give us a little more detail on your pool book of business, kind of where credit is trending there, to the extents to which your tiers lost years are limited, how far you are from being capped out on some of those, and whether or not you have other deals where you are actually approaching the end of your deductible and may incur incremental -- incur the losses there.

We'll let Scott answer that one.

In terms of the pool insurance, the pool insurance -- the way it's mirroring kind of the type of collateral, either in terms of vintage or products that actually is in the pools.

So for the stuff that has actually been breaching lately, that has been mostly subprime and Alt-A, and it's earlier books. But those kind of rates, default rates, are similar to what we're seeing in those product categories.

And what we've seen, really over the last several quarters, is incremental pool deals breaching kind of consistently each quarter. So it has been a component of our addition to incurred losses each quarter. And that should continue, although there is a limit to that because much of our pool insurance exposure is GSE pool, which has historically performed very well. Less of our overall risk consists of these transactions that we're talking about. So there's a finite amount that this can happen. But it will likely continue to occur.

Okay. And then, also, on the issue of the declining assumptions around rescissions and denials, can you give us a better sense of kind of what's going on there? I think you mentioned that you're seeing higher rebuttals in the rescissions. Is that just extending the process or is it actually reducing the number of rescissions you initially claimed had become effective?

This is Teresa. Bob mentioned that in his comments, and one of the things we are seeing is a higher level of rebuttals, which just elongates the process. When we've talked in the past, we've talked about kind of the importance of having maintained the process, having had transparency around the reasons for rescission, and also making sure that lenders have an opportunity to respond.

What we've seen is some lenders who, essentially, are rebutting in a lot of cases, whether there's validity to the rebuttal or new information. And so, that's just taking more time to work through that. And it means that it takes longer to get to kind of a final rescission. But we are still seeing right now the majority of those still end up in rescission.

Mark, I would just add that, over time, we know that the rescission levels are going to come down. We've incorporated that in our estimate. It's very difficult to get that timing right exactly when it's going to come down and how far it's going to come down. So, it's a difficult exercise. But we know it's going to come down over time.

Okay. And are the servicers being more responsive in getting you files, and therefore reducing the number of denials that you're doing?

I think it would be fair to say that the servicers in the last few months, particularly we saw this starting sometime maybe a quarter -- in the second quarter they were gearing up, have put a lot more resources behind managing the claims coming out.

So the claims coming in are in a better shape, which allows us to make the -- accelerate the payment we would make on the claims that we should make payments on. And again, I'd like to remind everybody that of the vast majority of the claims we receive, we do make payments and have made payments and that's where the value proposition of our product comes in. But in those instances where the claims are denied, they are also better organized in rebutting them, though in some instances, as Teresa mentioned, some of them just rebut everything and that causes our process to -- then we have to look at this set of rebuttals and basically go through them, though in the vast majority of instances, as Teresa pointed out, we still stand by our original claims -- the original rescission decision.

And I would just add that it really does vary by servicer. I think that, to S.A.'s point, many servicers have put a lot more focus on this. But some servicers have been in a better position to address some of those issues than others have.

Donna Halverstadt, Goldman Sachs.

I just had one question I wanted to ask you about reserves, and if we go back to slide 15, I was wondering if you'd be willing to make a broad generalization about what percent reserves you are, on average, for each of those delinquency aging buckets? And also, what percent reserved -- or what is the average age at which you are pretty much fully 100% reserved?

We haven't gone to that detail. I think what we said was that, obviously, the 12 payments or more is the reserve -- percentage of the reserve is going to be much greater than the number of delinquents. And the maximum reserve -- it ends up being -- in many states, it's 240 days. So eight payments, sometimes it's more than that, but by 12 payments or more, they are close to the max.

Edwin Groshans, Height Analytics.

Bob, I think in your comments, you talked about the slowness of the resolution process. And I just wanted to get a sense of -- in prior periods, resolution, the faster it occurred, the fewer losses were involved, and I guess there are some things like HAMP and things that are preventing a quick resolution. But are you seeing that, that the slow process is resulting in higher claims? And then, what steps can Radian take to try to expedite the process?

You know, I mean, it's not resulting in higher claims. It's resulting in higher old delinquencies. That's a really critical aspect of why the reserves keep going up is because they are not being resolved. They're just getting older and older. And some of them are in mod programs, including some that we have estimated to cure.

So, we want them to be resolved either way, but they are being stalled, and that's just a factor of the way the market is today, the efforts against foreclosure in terms of moratoriums and mods, et cetera. But, for us, all of those loans keep having reserves, and as they get older, they keep having more reserves.

I guess I thought in recent experience, the expectation was to sell a house or get that house done with today to avoid having a higher loss content if home prices continued to be weak. I guess you're not -- that's not a concern here or you're just not experiencing that with some of the foreclosures that you're going through?

Time is on our side. So if the foreclosure doesn't happen, there are a number of ways that the borrower can cure, including getting a modification or finding the means to pay his loan, especially ones that have the wherewithal, the strategic defaulters, who have the wherewithal to pay.

The cap that we have on interest limits our payment, regardless. So if a loan gets to be five years in default, we're not going to pay more ultimately. Our meter stops after two years on interest.

But you're right to the extent that it historically may be one of the factors that stood out in the way that servicers dealt with this process was when a loan went into default, and if it stayed in default, they typically moved on the foreclosure real fast.

For a variety of reasons, either they can't because of their various moratoriums that exist and because of the pressure they are under in terms of not to foreclose in certain geographies, or because they're working on modification programs, either HAMP programs or in many instances, while it's hard to track, we hear that there's a lot of private programs in place, and we don't know whether those private programs have the same modification terms or how long it will take for them to resolve, or because lenders and services are making deliberate decisions not to flood the market with foreclosures, and therefore they believe their best loss is a delayed loss.

We don't really understand exactly every motivation, but we believe it's a combination of these factors. This has resulted in a protracted play-out which is unprecedented in history, and that's what we've been talking about. This is not something we've seen in the past. It's causing the delinquency buckets to age, and you could speculate on various outcomes of the loans that are sitting in this aged default inventory, and we've been very careful in making our estimates and trying to find the best estimate in terms of how they will play out.

Great, and I appreciate that, S.A., because you are right. It is unique compared to what we've seen in the past.

Just one more technical question, if I could. With the interest that Radian would owe on some of these things as they go through modification, when they mod and become a cure, does that application go away or is that kind of tacked onto the end at some point in time?

This is Teresa. When a loan modifies, it comes out of the default population. So, there wouldn't be a claim forthcoming at that point. If it were to re-default at some point in the future, then it would be on the basis of the circumstances at that point in time. Does that answer your --

Great, yes, perfect. Thank you so much.

(Operator Instructions). Ron Bobman, Capital Returns.

I had a quick question on the prospect for the FHA raising the ongoing MI rates. In the past when the FHA raised the upfront MI fee, did they implement it immediately such that mortgages in their [app] pipeline were then going to be subject to the higher upfront fee, or was it in effect -- those were sort of grandfathered subject to the older, lower upfront fee?

You know, I don't really know the answer to that. I think it's unlikely that it would affect loans that have already been disclosed on and priced. I don't know how you could really do that. So I would think it would be on a go-forward basis. But I can't tell you historically exactly how they've implemented.

Matthew Howlett, Macquarie Research Equities.

Just on the financial guaranty, thanks for the additional disclosure. You expect this, obviously, to be -- to add back earnings to book value and be accretive to book value over timing. Where are you in terms of potentially commuting some of the reinsurance risk? I know you've talked about possibly starting negotiations with one counterparty, and then possibly just selling the business, given that it is going to be profitable going forward.

We'll have Dave talk about the reinsurance, and then I will talk about the selling of this.

We are always entertaining commutation discussions and clawback conversations, and we will pursue those that make economic sense for us. Obviously, those are two-party discussions and the other party has to agree to terms that we think make sense. But we're always evaluating those kinds of opportunities.

And in terms of the business, strategically what we've said is we are not writing any new business in our financial guaranty area. And we focus on commutation opportunities. If somebody were to offer us a commutation opportunity that was broader than individual deals and much larger, we would, from a management perspective, examine it and compare it to our own projections and make a recommendation to our Board based on what we saw.

Would there be possibly any interest in you selling the entire platform at some point? Would that be a possibility?

If there were parties who came to us with opportunities that made sense to us, then from a management point of view we would bring that up with our Board as is appropriate for something of this magnitude and strategic implication.

We are always open to making a decision that's in the best interest to our shareholders, and if that decision were deemed to be in the best interest of our shareholders, we would recommend it to our Board.

Great. We'll wait to hear from you on that. And just final question, nice pick-up in IW. What are you seeing in terms of pricing? There's at least one competitor that cut pricing.

And then, lastly, Congress is possibly talking about changing the way MI -- the structure of MI, possibly guaranteeing the entire loan or even down to a lower LTV. Any meaningful changes you see down in the pipeline? Thank you.

With respect to price, we obviously continue to take a look at what's going on from a pricing perspective. And we will continue to do that in terms of looking at our own products and what's going on competitively.

With at least one of our competitors who had dropped their pricing quite some time ago, we haven't seen a lot of traction with that, but we are continuing to monitor that, obviously.

With respect to what Congress might do, I think as there have been a lot of discussions about a number of different things, including the possibility that there could be MI on something less than 80% LTV. But I think those conversations are so preliminary that we can't -- we're not in a position to speculate at this point. The discussions around GSE reform and housing reform are really just getting underway, and we expect those to go well into 2011.

You may have seen the announcements -- the joint announcement from the White House, as well as from the Treasury and from HUD that Secretary Geithner and Donovan have been charged by the administration to start the process of getting -- soliciting input, industry input, into the future shape of the financial -- of the housing finance industry, and that process is just getting started.

We believe that the announcement of August 17 meeting in Washington that is going to be held at the Treasury Department, which represents the kick-off from the administration's perspective of a discussion process, and that would determine their recommendation to Congress on the future of the housing finance system. And we -- from the industry, we expect several participants to participate in that, including ourselves.

[Chris Owens], [Tres Celeste].

My question is, do you guys have the underwriting capacity to handle significant amounts of new business if the FHA pricing increase goes through?

Absolutely. In fact, that was part of what our whole Radian is Ready campaign was about was to make sure that lenders understood that we had the capacity and wanted to write a significant amount of new business. So, we'd like to see that happen as soon as possible.

Then question number two, just alluding to something that Bob had mentioned, about -- typically after 240 days, you're required to be fully reserved for a loan. How do I sort of mesh that with the thought that -- the alternate comment you guys made that you expect a significant amount of those loans to cure?

Chris, it's not necessarily a 240. In a lot of states, it is. It really depends on the state and the foreclosure process. That was just an example. And fully reserved, meaning it's not going to go up if it goes, for example, from 21 months to 22 months, but not fully reserved like it's 100% going to go to claims. So, I hope that clarifies it a little.

I'm not really sure I understand the distinction.

The reserve is not necessarily going to go up if an old loan that is considered fully reserved is one month older. That loan is still going to have a cure rate attached to it until it becomes a pending claim. All loans prior to pending claims have some cure rate attached to it.

Okay, so the cure rate just flat-lines once you reach a certain point. Okay.

Essentially.

Is it fair to think of those loans as fully reserved with that certain cure rate less than a rescission estimate once in that 12-month bucket, or are you guys sort of thinking there is something different about this bucket, given the modification characteristics it might exhibit?

Those loans that have the highest expectation of going to claim, and then we would net the rescission from that. So the cures from that bucket would be much, much less.

Okay. Do you guys -- would you guys disclose your cure rate assumptions from the 12-month-plus bucket?

We haven't as of yet.

Is it fair to think of it as insignificant?

I think in terms of relative, it's smaller. It's hard to make a statement like it's insignificant.

Chris, you also made the comment that implied there was a modification adjustment to those loans. We have a roll rate factor we built in, but we do not have exclusive modification adjustments.

Thank you.

Our last question will come from the line of [Ryan Stevens], Philadelphia Financial.

Our question has been asked. Thank you.

I would now like to turn the conference back over to S.A. Ibrahim.

Thank you, Operator, and thank you all for participating in our call. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.