C-Bass breaks up Radian/MGIC marriage

Implications: This article is important because it announces the break up of what was to be one of the most synergistic mergers in mortgage-insurance history.  MGIC with its portfolio of traditional mortgage and bond insurance business  coupled with a bit of international exposure and Radian with its new product development skills and ability to rapidly respond to clients and assist them in assessing and pricing risk.  Unfortunately Radian lost MGIC's interest when their in-housen expertise at pricing and profiting from distressed mortgages -C-Bass lost  US$1 billion in market value due to investments in non-investment grade subprime mbs.

Analysis: The most significant impact this merger will have is the imminent downgrading of Radian by all three rating agencies.  Both firms have announced that Radian would lose its AA/A2 rating if the MGIC merger was off.

Radian's value (and consequently that of its insured municipal bonds and of mortgage pools backing mbs issues which are guaranteed by Radian) will collapse without its AA rating.  The AA rating is specifically what makes Radian attractive as a mortgage and bond insurer.  At the very least, a downgrading would impact what Radian could charge for its guarantees, at worst, their business will completely evaporate.

Unfortunately, Radian's primary source of dealing with any distressed loans it ends up taking into portfolio due to borrower defaults is C-Bass.  A victim of marking to market, C-Bass' still has a tremendous platform for pricing, re-underwriting and selling (at a substantial profit) distressed loan portfolios.  That is a business that is growing at a tremendous rate and C-Bass is poised to take advantage of it.

Will Radian end up giving C-Bass capital to grow their business?  Highly doubtful for a variety of obvious reasons?  Selling C-Bass and its US$1 billion market value loss is much more likely.  Would MGIC, who also is a part-owner of C-Bass, be a potential purchaser? Again, doubtful, as the C-Bass loss is the primary cause of MGIC's turning runaway bride.