Radian Group Inc (RDN) 2011 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to Radian's first quarter 2011 earnings call. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions)

As a reminder this conference is being recorded. I would now like to turn the conference over to our host Emily Riley, Vice President of Financial Communications. Please go ahead.

Thank you and welcome to Radian's first quarter 2011 conference call. Our press release, which contains Radian's financial results for the quarter, was issued earlier today and is posted to the investor 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 Bazemore, President of Radian Guaranty, and Dave Beidler President of Radian Asset Assurance.

Before we begin I would like to remind you that comments made during this call will be 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 included in our 2010 form 10K. This is also available on our website. Now I would like to turn the call over to

Thank you Emily, and thank you all for joining us. Today I would like to first review the macro economic factors affecting our business, and then highlight a few aspects of our financial performance in the quarter. Next I will turn the call over to Bob to cover the details of our financial position. Before we open the call to your questions, I will comment on recent legislation important to our business.

Many headlines last week focused on Federal Reserve Chairman Bernanke's remarks on the state of the economy. While he pointed positively to a moderate improvement in the general economy, he also called out the housing market as a drain on growth. He emphasized that the US economy grew at a sluggish 1.8% annualized rate in the first 3 months of the year, while unemployment remained stubbornly high at 8.8%. He called our nations depressed housing market the primary endpoint in our economic recovery. Unfortunately this stagnant housing market clearly impacted our mortgage insurance results in the first quarter.

Despite encouraging trends over the past year, including continued decline in our mortgage insurance delinquencies, our ability to maintain a strong share of today's high quality mortgage insurance business, and our progress in regaining share from the FHA , the ongoing fourth quarter issues and languishing delinquencies in late stages of default weighed heavily on our mortgage insurance business. We have provided several new disclosures this quarter to help you better understand this effect on our delinquency portfolio. Bob will provide more details on these.

But the clearest illustration of our aging delinquency population may be found on webcast slide 13, where you can see that loans at least 12 months past due now account for 52% of our delinquency portfolio. To provide perspective on this number, our percentage of loans in this late stage of delinquencies in more normal times before the downturn, was in the 10% to 20% range. Yet, as we have updated this chart over the past several quarters, the percentage of loans in this category have continued to increase.

Turning to our first quarter financial results, earlier today, we reported net income of $103 million, or $0.77 per diluted share. This includes the impact of fair value gains of $319 million. We saw this quarter how Radian's spread widening impacted the fair value line significantly, resulting in the realization of some of the positive book value impact that we have said we expect to grow over time. As of March 31, 2011, our book value per share was $7.31.

Our mortgage insurance provision for losses was $414 million versus $529 million last year. Bob will explain the trends affecting this number in the first quarter. However, it is important to note that our mortgage insurance loss reserve was flat to the fourth quarter of 2010 at $3.5 billion. This resulted in an increase to our reserve for primary default, which now stands at $25,714, as shown on webcast slide 14.

Uncertainty clearly remains regarding the final outcome of the delinquent loans in our portfolio, particularly the oldest, late stage buckets. Yet we believe that our loss reserves for default positions Radian well as these late stage loans are ultimately resolved. We have been encouraged by the Administration's recent efforts to improve servicing practices with a focus on streamlining contact with borrowers, and encouraging more successful modifications. In recent weeks, we have seen a slight increase in the number of claims received as servicers begin to resume foreclosure proceedings following the robo-signing issues and foreclosure suspensions that began last year.

For 2011, we continue to expect big claims of approximately $1.7 billion. The total number of primary delinquent loans decreased by 7% in the first quarter from the fourth quarter of last year, which represented the fifth consecutive quarterly decline. And in April, we were encouraged by a yet another decline in delinquent loans. This represents the 16th straight month of progress in managing our legacy portfolio.

Our risk to capital ratio, which is an important measure of Radian Guaranty's financial strength, was 20.3 to 1. Importantly, we maintain sufficient liquidity at the holding company to contribute additional capital to our mortgage insurance business if needed. The $2.6 billion of new mortgage insurance business we wrote in the quarter should be viewed in the context of a record low origination market, as well as the seasonal effect of a traditional weak first quarter. Yet, our NIW increased over the $1.9 billion written a year ago.

And we successfully maintained our strong share of today's high quality mortgage insurance business. This business again consisted of loans with outstanding risk characteristics. 100% prime quality, and 81% with FICO scores of 740 or above. We have continued to make progress as an industry in recapturing market share from the FHA. We estimate that the private mortgage insurance industry has doubled its market share penetration from the FHA's peak in the fourth quarter of 2009. The price increase implemented by the FHA last month would also help our industry regain share, and we are additionally encouraged by the changes in loan officer compensation in April that eliminated the financial incentives for choosing an FHA loan over a conventional loan.

Finally, it is important to note that Radian Asset, our financial guaranty company, continues to serve as a unique source of capital for our mortgage insurance business. Despite a challenging environment again for the financial guaranty industry, excluding gains and losses on derivatives and other financial instruments, Radian Asset was break even in the first quarter. Consistent with our strategy of minimizing Radian's financial guaranty risk, our net for outstanding was reduced by more than $1 billion in the first quarter. Which included the termination of our TrupS deal with $85 million of exposure.

In addition, a little over $2 billion of par exposure consisting of reinsurance in corporate CDOs was terminated in April, with a slight positive impact to our statutory surplus. During the first quarter, we booked modest incremental losses on a handful of public finance and structured finance transactions, including approximately $5.6 million in instrumental reserves related to Jefferson County. There was a continuation of generally stabilized credit trends in the first quarter, and we expect Radian Asset to pay another ordinary dividend to Radian Guaranty in June of 2011 of $53 million. This dividend payment has decreased slightly from previous expectations due to a reduction in our expected investment income.

Now I would like to turn the call over to Bob for details of our financial

Thank you S.A. I'll be updating you on the P&L activity and trends for the first quarter of 2011, and our financial position as of March 31, 2011. Our provision for losses remained at an elevated level of $414 million this quarter despite the continuing improvement in our overall delinquencies. To give you a better idea of exactly what comprises our incurred losses, we have added disclosure this quarter on webcast slide 12, which break down our incurred loss into its major components.

Including, one, loss reserves on new defaults that arose during the quarter. Two, the reduction in reserves on loans that have cured or prepaid. Three, the net incremental reserve on existing defaults, primarily driven by delinquency aging, which typically requires additional reserves. And by claims received for which we typically increase our gross reserve to the total potential claim payment. And four, the incurred loss relating to the disposition of claims which includes denials and recisions.

In an ideal world, if our actual performance matches our assumptions, the incurred loss component other than the reserves of new defaults, would zero out over time. But in this extremely uncertain environment, these components have been volatile. For example, the fourth category has incurred losses relating to the disposition of claims has been impacted significantly by denials and recisions , including this quarter by a $70 million increase in our IBNR estimate for future overturns of denials and recisions. While new defaults have declined, which is very positive, cures have generally come from earlier default buckets while the older delinquent loans have mainly either stay delinquent or rolled to pending claims.

On webcast slide 13 we have added significant loss reserve disclosures including the total reserves for each delinquent loan bucket, along with our current expected role rates by bucket, on a gross basis and a net of expected denials and recisions. We hope this helps you better understand the composition of our loss reserve estimate. As you can see, our reserve estimate includes an expectation that many of these older delinquent loans will not ultimately be claims, and our borrower outreach efforts have appeared to support that general expectation. However, most of these loans have remained in the late stage delinquency bucket, and have not cured either naturally or by completing a modification.

We are working hard to proactively address these old delinquencies, but it is a long and difficult process, often on a loan by loan basis. The dollar amount of loss avoided on submitted claims related to denials and recisions for the first quarter of 2011 was approximately $152 million, compared to $267 million in the fourth quarter of 2010. These figures are net of the overturns that occurred during the quarter, which have increased significantly. Claims paid in the first quarter were $365 million, excluding any potential commutation payments or active terminations, we expect claims paid in the second quarter to be approximately $430 million and for 2011, we still believe that claims paid will be in the $1.7 billion range.

Premiums earned this quarter were positively impacted by a decline in ceded premiums due to the termination of most of our captive arrangements, and a small impact of this quarter from a premium refund accrual reduction related to the future recisions. The overall premiums earned were up from the first quarter of 2010, but down from the fourth quarter when our refund accrual was reduced more significantly. The change in fair value line was primarily impacted this quarter by a widening of Radian's own credit spread . Contributing to a net fair value great on derivative instruments for the quarter of $244 million, and a $75 million fair value gain in the gain on other financial instruments line.

The total of our March 31, 2011 balance sheet amount, related to our derivative exposures and consolidated transactions, is now a net app GAAP liability of approximately $639 million. This is $111.5 million more than our current estimate of the net present value of credit loss payments of $527 million, as shown on webcast slide number 8. Our holding company cash resources at the end of 2011 are projected to be approximately $630 million after giving effect to the amounts we can redeem from our CPS securities, and subtracting all expected payments through 2011, including full repayment of our debt maturing in June 2011. We may use some of this available liquidity to make a contribution from Radian Group to Radian Guaranty if necessary during 2011 in order to maintain a strong risk to capital position.

I would now like to turn the call back over to S.A. for a

Thank you, Bob. Before we open the call to your questions, I would like to briefly discuss the legislative issues important to Radian. As many of you know, the proposed rule for risk retention for residential mortgages was issued for comment. The rule includes a definition for a qualified residential mortgage or QRM , the comment period ends on June 10, and while there is no set date for implementation, the Dodd-Frank bill calls for its adoption one year after the final rules are published.

While the proposed definition specifically identifies a 20% down payment as the qualifying criteria, as well as an exemption for FHA, the draft also states that a guaranty provided by GSE, while operating under conservatorship, is exempt from any risk retention requirements. The proposed definition has caused quite a bit of concern, among a broad group in Washington and around the country. Since research shows that one third of our nation's home buyers would be either adversely impacted or effectively shutout of the market if required to make the 20% down payment.

Various trade, industry and consumer groups, as well as both Republican and Democratic leaders in the House and Senate, have all supported a lower down payment for deserving borrowers. The regulators are specifically seeking comment on the possibility of expanding the QRM definition to include loans with a lower down payment that are protected by private mortgage insurance. Teresa and I, along with our industry peers, have spent time on Capitol Hill to demonstrate the value of our product, explaining that the presence of private mortgage insurance in fact insures that the private sector has skin in the game, thereby meeting the intent of the risk retention requirements.

As we work towards educating key decision-makers regarding the unique role of private mortgage insurance in both expanding homeownership as well as protecting taxpayers, we anticipate that our customers will continue to originate conventional loans with private mortgage insurance. In terms of GSE reform, there have been several congressional hearings on the proposed options for housing finance. Studies have been issued, and some legislation introduced.

During our visits on the Hill, we continue to hear a resounding support for private capital in overall housing finance reform efforts. Obviously the FHA has already taken steps to decrease its risk, and the ultimate risk to taxpayers by implementing its second price increase in less than a year. While the QRM and GSE reform efforts have a relatively long road ahead, we are encouraged by the bipartisan support for putting private capital at risk in a way that would protect taxpayers and expand homeownership. Based on this sentiment, we expect private mortgage insurance to continue to have a role in serving the needs of low down payment borrowers as the housing market recovers.

Before we take a your questions let me summarize for a four important points. First, mortgage insurance delinquency trends are positive, with 16 straight months of decline. Second, we believe our existing MI book of business as of March 31 contains an embedded value of $1.5 billion as shown on slide 10 in our webcast presentation. Third, for Radian, Radian Asset continues to serve as the unique source of capital for our mortgage insurance business. The Company was break even in the quarter, and continue to reduce its risk while paying dividends to Radian Guaranty. Fourth, Radian's mortgage insurance business remains competitively well-positioned, given our risk to capital, market share, financial flexibility and reserve strength.

And now operator we would like to open the call for

Thank you. Ladies and gentlemen if you would like to ask a question (Operator Instructions) Our first question comes from Douglas Harter with Credit Suisse. Please go ahead.

Thanks. I was wondering if you could sort of, looking at the aging of the portfolio and looking at sort of expected role rates, do you have a sense yet as to when it might sort of top out at that 12 plus month percentage?

I think what we are seeing , we are seeing the continued movement towards the 12 month, but we are also seeing a slowdown in the new defaults reported. So I think the percentage of loans in that late stage will likely stay high and perhaps go higher. However, we do expect overall number of delinquent loans to

So is that percentage were to go higher, would that lead to a continual need for a higher reserve per default in the coming quarters? All things being equal?

On those loans, all things being equal, yes, because those have a higher expectation of rolling to claim.

And I guess just on that, if you could compare the inflows to new 12 plus months from the 4 to 11, versus what you expect to pay, should we -- at a point where the dollar, or the number of loans should start to decline?

I'm sorry can you repeat that Doug?

Yes, I mean I guess if you were to look at the loans that are sort of rolling into the 12 plus months that continue to age from the 4 to 11 bucket compared to the expected claims that you expect to pay, are we at a point where the total number of 12 plus month loans can decline?

Well we are seeing some cure activity in the 12 plus months, and that has actually picked up recently a little bit. It is still at a relatively low level, but we have seen it picked up. So we do expect more cures to come from the 12 plus months over time, as well as the 4 to 11 as well.

And Doug, as you know, because it has been so well publicized, one of the factors that compounds the uncertainty related to the reduction and the aged bucket is eventually how the AGs come out, and what the settlement is in terms of servicing, and the sequential requirements going forward for servicer' to exhaust potentially all modifications possible of these, and then go through layers of checks on the completeness and accuracy of the documentation before they can foreclose. And while it is possible that, that may result in some loans that otherwise would have gone into foreclosure, not going into foreclosure, we are in an environment of such uncertainty that we cannot predict that.

Great. Thank you S.A.

We have a question from Mike Grondahl with Northland Capital. Please go ahead.

Yes, thanks for taking my question. Two questions. One, can you just give us your outlook for modifications going forward, whether it is a HAMP mod's or other mod's? Kind of what you are seeing there? And then maybe if you could just kind of handicap the risk in your financial guaranty book compared to a year ago? And then lastly, any plans for that financial guaranty shell that you bought at the end of last year? Thank you.

Hello Mike, this is Teresa. I will take the question on loan modifications. And we are continuing to see load modifications come through. The proprietary mod's continue to be a much larger percentage of the mod's that are coming through. And what we anticipate is that we will see some increase in modification activity, but it is difficult to sort of really handicap what exactly that is going to look like. The discussion that S.A. was just having about what the services are going to be focused on, the consent orders are essentially moving forward, and they appear to be requiring a single point of contact for borrowers.

And as you may recall, a lot of the complaints related to loan mod's and whether loan mod's went through effectively or happened, was related to borrowers saying that they kept getting shuttled around to the servicing shops. So we think with that one point of contact, sort of a renewed focus on trying to see which loans can be modified. We will certainly be working with the servicer' hand in hand, and try to make as many of those happen as possible. We believe that we will see in an increase there. But we don't have any way right now of sort of knowing what that is going to look like.

And Mike, on your SG, Dave Beidler will answer the first part of your question, then I will address the shell.

I believe Mike, the first part of your question was if I had the handicap the portfolio's performance this year as opposed to a year ago, and I would say that we have seen stabilizing trends in some of our most important credit classes including our corporate CDO portfolio and our top portfolio. And that would be the most important sort of handicap update I could give you at this point.

And Dave, could you maybe just what you mean by stabilizing trends? Just kind of help us understand that? Thanks.

Well there have been basically credit upgrades in the corporate CDO portfolio. We do not have any a credit event in that portfolio in this quarter at all. And in the tops portfolio we have seen stabilization in most of our individual transactions in the underlying collateral.

Okay thank you.

And Mike, in terms of the shell, first of all, we feel very positive that we have the shell that we did acquire the shell because it gives us the opportunity to explore different alternatives going forward. We continue to look at various alternatives relating to the shell, but most importantly, we are waiting a waiting the final outcome of S&P's model based on which we can get some clarity on how -- what it will take to get a rating from S&P that will allow us to go forward with some of the alternative that we are exploring. So far we, based on the preliminary work we have done, we have had some encouraging conversation with potential investors. And potentially view that there may be opportunities for us based on conversations with many players who make the market and Muni bonds. But the S&P clarity is essential before we can continue to explore alternatives.

Okay. Thanks guys.

We have a question from Matthew Howlett with Macquarie. Please go ahead.

Oh, hello guys thanks for taking my question. Just, Bob, on the long-term default forecast, you took the frequency up. I mean was that entirely related to a lower embedded rescission rate going forward? Or was it just a combination of that and harsher is sort of role rates for the later stage delinquencies?

Yes, Matt, it's not role rates, it is the rescission denial estimates, and it's also just the composition. So the fact that the inventory is aged more, naturally we are going to have a higher roll rate attached to that. It's not like we took the respective role rates up.

Okay it's just more shifting into that bucket?

That's right.

And then just getting back to the rescission's. On slide 12, the $111 million with the claim dispositions, can you just walk us through what goes on there? Is it that the lender pushes back on the rescission, it goes into arbitration, and you end up losing? Is that what ended up happening?

No. The claim dispositions line's going to have a bunch of stuff in it. So it's going to have changes in our rescission denial estimates in there, it is going to have this impact from the estimate of future overturn. So it is really the changes in the balance sheet, the actual realization is going to -- is not going to be there. It is also going to be the difference between the reserve on the claims we pay, versus what the actual reserve was right before we pay it. So it is really the claims that have either been paid and or related to the denials in rescission's. So the most prominent component of that this quarter was the denials and rescission's. And yes we do have instances where there is pushback, and what we call rebuttal. And we will go through it, and most often that won't change the status. But sometimes if new information is provided it would -- potentially change the status where we would either reinstate the loan or pay the claim.

Okay. I mean is there any clarity that you can give us going forward on that line? Did it change any of your, is that just going to be volatile line going forward, or could it work in some cases for you in some quarters?

Yes, certainly it could. Now we have attempted to capture the future, so this is something that has almost no history to it. And the changes in the past year have been, or a couple of years, have really been very substantial. So for 2009 we increased our rescission estimate dramatically, in 2010 we cut it back some. So yes, it is kind of volatile because there is very little history and it is changing quickly. But we always tried to capture the future as best we can, and again, we believe we have captured the estimate for the future denial and rescission's; hopefully we have done it accurately, but it is certainly subject to the uncertainty.

Okay, got you. And then just last question. On the risk to capital, I think you guys are second best in the industry in terms of risk to statutory capital. Some of your peers seem perfectly comfortable with going above the 25 to 1, getting, you know they've received the waivers in the majority of the states. You guys, I think you said in the call, you're interested in maybe dividing down some cash from the holding company to stay below 25, and why do you see the urgencies to gain market share? Could the cash be used to do something else? If you just don't mind going over the 25 if that ends being the case? Given your peers that really hasn't impacted them?

All we said is that we continue to have the flexibility. In the event we deem it necessary to contribute capital to Radian Guaranty. We have not concluded whether we will at what ratio we will maintain, and what the drivers of that would be. Clearly, the driver of that we focus on most is maintaining a strong competitive position to the extent that strong competitive position translates into the opportunity to do business in a stronger fashion with our customers. And we will keep monitoring it, and we will keep retaining the flexibility, and we will act as necessary and while we have not concluded how we will proceed with this, clearly the fact that others have gone above 25 to 1 gives us more room to play.

Great. Thanks guys.

(Operator Instructions)We have a question from Nat Otis with KBW. Please go ahead.

I guess first, maybe following up on that. On those rebuttals, is there any way to give a little bit more color, are you talking about more people, say, that you have had a denial on, and they are coming back with the paperwork? Or is a rescission related? Is there any color that you can give on what type of circumstances might be more prevalent, and when the lenders and services are coming back you?

Sure, this is Teresa, Nat. Let me just split those into two buckets. One is the denials, and often the denials are related to an inability to provide documentation up-front in order to perfect the claim, and allow us to move forward with reviewing it. And so in that case, we usually notify the servicer to try to get that documentation in, but sometimes after we have given them a good deal of time to do that, and we actually send them a notice that it has been denied, we may get after that the actual documentation, and then we have to reinstate that loan. And then we, then, go through the process of looking at that claim and they could subsequently, it could be subsequently rescinded. So that is just to sort of put that in perspective.

Separately, on the rescission's, and those are where we decided to rescind the coverage based on our review of the loan and the loan file. And in those cases, that is where we really get what we talked about in terms of rebuttals. Where someone essentially refutes our grounds for the rescission. And then we have a separate group here that looks at those rebuttals to determine whether or not there is any validity. Those are sort of all over the board. Some lenders just rebut as a normal course without really providing any new information. And others have actually brought new information to the table that makes a difference in our decision. But as Bob said, the rate of -- most of those decisions are not overturned.

Okay. And are there any other trends that you are seeing in that, kind of increase in those rebuttals and things like that? Is there anything that you can point out that the servicer' are doing different, or are doing more often now than in the past?

I think that over the last, probably two to maybe three quarters, we have seen a higher level of rebuttals coming in as some of the servicer' have sort of staffed up in those areas to try to look at those rescission's as they come in. So we have seen sort of a heightened level of activity there. But it has not changed the overturn rate considerably.

Okay. So could very easily be staffing driven , certainly more coming in, but if you're not seeing any changes down the road, there might not necessarily be that much of a

Yes. And obviously we are looking at these on an individual loan or claim basis. But yes, at this point, while we have a higher number we are not seeing, or at least seeing any trends that would lead us to believe that there any sort of major change afoot.

Okay great. And then just, I think you talked about premiums, that there was some accrual related to a rescission and denial activity. Did you give a number on that for the quarter?

No I did not give it. I can give it to you offline, but I just give a directional movement.

Okay. And then lastly, just you talked about claims going up a little bit as of late in the last couple weeks. Is that or would you say that ,that is a direct result of maybe that servicer settlement, and people may be getting more comfortable with things going forward? Or anything else there?

I wouldn't necessarily say it was the servicer' settlement yet, because I think that they are still just sort of getting that in place. I do think that with all of the sort of robo-signing and other foreclosure issues, as you saw , a lot of the major servicer' took a pause to re-look at what was in their pipeline, to re-look at their processes and procedures to make sure they had the right procedures going forward. And we saw some sort of a slowdown in what was being sent to foreclosure, and I think we started to see that pickup earlier this year and we are starting to see some of those come through at this

Okay. Very helpful. Thank you.

We have a question from Donna Halverstadt with Goldman Sachs. Please go ahead.

Good morning. I had two questions and they are both follow-ups. The first question I wanted to follow-up on the competitive positioning response you gave to the risk to cap question. And a two-part follow-up. One, do you expect that at some point in the near future that GSEs might actually tighten up a bit on the requirements that they have for which MI's they're kind of wrapped the loans that go into them? And secondly, do you get the sense that when the lenders are allocating loans across the MI's that they are starting to differentiate a bit more based on factors like risk to cap?

Regarding the GSEs, I really don't have much color there. Teresa do you?

I would say that the GSE have been talking about revising the MI eligibility requirement for quite some time now. And so it's hard to say whether they will move forward with that, or how they'll look, and whether they will have any impact in terms of the group of MI's that are currently approved. So I think we really don't know enough about that at this point.

In terms of the second aspect, we do believe that some of the major lenders who, during the last couple of years when there was an increased uncertainty surrounding the MI's, had decided to manage their risk of doing business with MI's by diversifying their business among a number of mortgage insurance players. Some of them may be looking for operational reasons to narrow the number of mortgage insurance companies with whom they do business. Indeed some of them are in the process, and have solicited bids to limit the number of MI companies that they do business with . And while there is no -- there is a direct relationship to risk to capital, we certainly, since we have the flexibility, we wanted to be strongly

Okay thanks. And then the other follow-up I had relates to the discussion related to an increase in overturns and building that into your reserves. Now based on what Teresa said, it sounds like at this point that process is more related to rebuttals i.e. discussions? Or has that activity actually resulted in more of that discussion going to arbitration? Or more of that discussion actually going to lawsuits?

Yes, well, yes. I mean, that's been sort of just an internal process that we've have had with those lenders. We haven't had any arbitrations at this point, or any sort of material litigation. So it has been our own internal process which we put in place to quite some time ago.

Great, thank you guys.

We have a question from Scott Frost with Bank of America Merrill Lynch. Please go ahead.

Hello. I wanted to go over some of your arguments for regulators with respect to the relevance of private mortgage insurance. It seems that what they're saying is that they're more interested in preventing defaults in the first place in homeownership, and correct me if I'm wrong, but the idea behind PMI is that you increase homeownership and the additional credit costs that may occur are more than offset by the furthered goal of homeownership. Are your arguments along the lines of disputing their seeming contention that you don't mitigate defaults? Or is it that if you keep the current rule for QRM's you're going to sort of slow the housing recovery and housing market down?

I think it's really both. And I think that we believe as an industry that we have provided data that should show that if you compare loans that were originated that were less than 20% down and they were loans that had MI versus loans that didn't have MI, that there was a much better performance rate on those loans, or a lower risk factor over default rate on those loans. In addition, when you couple that with the cure rate which is also higher on MI insured loans, we believe that we can show that there is an improvement in frequency, but also, very importantly, on severity. So when we are talking about protecting the taxpayer, protecting the investor, and the mortgage securities or the mortgage loans, it also reduces their loss. So we are focused on sort of both of those.

I think not only is the MI industry, but also the mortgage banking industry, the realtors, the home builders and many of the consumer groups are also concerned about your other point, which is what this would do to the overall housing industry and the economy. And there is a huge concern that this would lock out a significant number of home buyers that are, in fact, credit worthy, and home buyers that we have been lending to over the last 2.5 years very successfully. And that we also were lending to very successfully before the recent crisis.

Okay. So just to reiterate, you are saying that loans with lower down payments that include private mortgage insurance, you are saying that there is a frequency of default mitigation, I guess, affect by using that ? And that would lower default frequency as opposed to what the regulators seem to be saying, which is that it really does not have much of an effect on default frequency. Is that

Yes I think that is right. And I think if you look at what the regulators focused on, they were essentially trying to compare loans with less than a 20% down payment with loans with more than a 20% down payment. Which, you would expect loans to have a lower frequency anyway. So, the irony is that if you actually look at it from an investor point of view, the loans that have a 20% down payment have less protection, if you will, for an investor, than a loan, with say a 5% down payment with MI, which actually covers the investor down to about an effective 67% LTV.

So I think a lot of it is educational in terms of helping the regulators to understand this. And we've also spent a lot of time on the Hill, there have been a number of members of Congress who have sent letters to the regulators. That is continuing to weigh in about legislative intent. And when you talk to some of the folks who were involved in drafting the QRM, they were more focused on the risk of loss to the investor versus sort of those concept of frequency.

It is also very clear that not all agencies involved in the initial proposed regulation agreed. So we believe that there is an agency or more than one agency who certainly have a greater appreciation of our perspective.

Okay thanks.

We have a question from Douglas Harter with Credit Suisse. Please go ahead.

Yes thank you. I was hoping that you could help put in context along the reserves, your expected, the expected percentage that expect to go to claim? Just help us about that to get comfortable with the fact that those are the right numbers?

You know obviously we believe that the longer the loans stays in delinquency and moves toward being an older loan, it has a higher chance of going to claim. Than the one minus the role rates would be the expected cure rates, or now what we say the expected rates for which loans will not be claims. And there are several ways for that to happen. A natural cures are the most prominent, and those are people that just find a way to make their payments, catch up, and become current on their loans. The second, which is also very prominent, is modifications. And certainly in this environment, we believe that many of our delinquent loans are either in modification programs already, or are candidates to be in modification programs. So certainly we expect significant mod's over time in the future.

And then, the third one, which I think is more recent, is relating to loans that will not be foreclosures for reasons of documentation, or servicing, or other items which is very hard to quantify at this time, but we have heard a lot of information about that. From lenders, from servicer', from others relating to loans that have been in delinquency for a long time, but there is a reason that they have not gone to foreclosure, because they lack the necessary, either documentation, or title, or other means to become appropriate foreclosures.

Thank you.

Sure.

We have a question from Steve Stelmach with FBR . Please go

Hello good morning. Just a follow-up on that a little bit. Looking on page 13, Bob, is it possible to give me the historical framework around the claim rates per bucket? Where are we today versus where has been historically?

You know we have not done that, certainly directionally Steve. The current expected low rates are higher than historic levels. I don't think there is any secret about that --.

-- I'm sorry go ahead.

I was just going to say that they're there for a reason. Because there is very little equity, if any, in the homes. So home prices have come down a lot, which certainly -- helps determine that. So a lot of the loans are from vintages that were poorly underwritten. So there's a reason why they are higher. Where they will come out, we are doing our best to project it, but there is a lot of uncertainty as we have said many times.

Yes, for sure. Any way to sort of quantify or sort of give a degree of magnitude of where expected claim rates are today versus where they were in one of the typical cycles? Are talking a few hundred basis points higher, or are we talking multiples higher?

I think it is more the latter, but we don't have the exact numbers and it depends on what history you are looking at, and all that. So I think it's hard to pinpoint, but I think it is safe to say that they are higher than historical average.

Okay. Thanks, Bob.

Our final question comes from Nat Otis with KBW. Please go ahead.

Yes thanks. Just two quick follow-ups. One, just any color on what buckets the paid claims are coming from? Are they all coming from that 12 month and beyond bucket, or is it equally throughout?

Most of the paid claims in any quarter are going to come from the oldest bucket. There are occasions where we do pick claims from the earlier buckets, but it is a very small amount.

All right. And then just lastly, you had a little bit of commentary on Jefferson County, they were certainly hit by the tornadoes. Does the impact of the tornadoes and the impact on the local economy, is there any sort of color that you could provide on what you're thinking about that going forward with your respect exposure there?

We are, of course, mindful of the fact that there in the eye of the storm, so to speak. But with respect to the deal specifically, we don't believe that, at this point, that the storm had a big impact on that transaction. We increased our reserve a little bit, as we disclosed, and that has more to do with the actions of the receiver thus far. And the fact that we think that there is a little bit greater profitability that bankruptcy is an option that the county might pursue. But that is still a very fluid situation.

Okay. Thank you.

I would now like to turn the conference over to S.A. Ibrahim for closing remarks.

Thank you operator. And I would like to thank everybody for participating on our call. And see you next quarter. Thanks.

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.