Summary
All it takes is a sympathetic plaintiff who lost a home to foreclosure and a creative lawyer and suddenly you have a new wave of lawsuits to defend. By accepting premiums for the issuance of mortgage insurance from consumers, the mortgage insurance industry may get dragged into court to explain why their underwriting also failed to detect the residential lending crisis.
Analysis
The mortgage insurance industry is certainly facing increased claims from holders of mortgages in default which have resulted in short sales or foreclosures with a net loss at sale. Presumably, the reserves held by these insurers will be adequate to deal with the resulting losses even though the losses may be greater than originally underwritten. Why then would this group be looking to raise capital to shore up their balance sheets now when capital is no longer easy to find or cheap? I suspect the raising of capital is in response to an as yet unrealized fear of liability exposure to the individual consumers who bought homes agressively and paid the premiums for mortgage insurance.
It doesn't take much to visulaize an aggressive law firm filing suit against a mortgage insurer alleging that the act of accepting the premium and issuing the insurance policy misled the consumer to believe the transaction was sound and the underwritten value of the home realistic. All it takes is one such suit to start the deluge...and if you live in Wisconsin, you know that a deluge often preceeds severe flooding.
If the internal and external risk management teams in the mortgage insurance industry are on the ball, they are seeing the same dark clouds on the horizon and have advised management to act accordingly...like raising new capital before the proverbial other shoe drops.
