Dire Warning from PMI

After more than three decades in business, PMI Mortgage Insurance Co. is warning that it might not be able to continue insuring mortgages.

In its second-quarter earnings report, parent The PMI Group Inc. reported a $135 million net loss. The poor results came despite a $151 million gain on the sale of discontinued operations.

The Walnut Creek, Calif.-based firm said it had losses of $151 million a year earlier.

“Our U.S. mortgage insurance operations will continue to incur significant losses,” an accompanying 10-Q filing with the Securities and Exchange Commission said.

PMI wrote $1.4 billion in mortgage insurance policies, less than $1.5 billion three months earlier and $1.6 billion a year earlier. Policies in forces fell to $96.9 billion from $99.3 billion and were $107.6 billion at the same time last year.

The SEC filing indicated that PMI Mortgage Insurance’s policyholders’ position fell to $320 million below the minimum required by law in Arizona — the location of its primary regulator, the Arizona Department of Insurance. The company acknowledged that the regulator could force it to stop writing new business.

“If the department were to determine that PMI Mortgage Insurance’s financial condition warranted regulatory action, it could, among other actions, issue an administrative corrective order requiring PMI Mortgage Insurance to suspend writing new business in all states,” the filing stated.

The mortgage insurer said that it is operating under regulatory waivers in 10 states, and the waivers expire on Dec. 31 in four of those states — though they could be withdrawn in any of the 10 states at any time.

“We expect the number of states in which PMI Mortgage Insurance is precluded from writing new business to significantly increase,” PMI said.

In six states where the operating subsidiary is already prohibited from writing new policies, PMI Mortgage Assurance Co. — a subsidiary of PMI Mortgage Insurance — started writing polices during the third quarter. That entity was approved by Fannie Mae and Freddie Mac as “a limited, direct issuer of mortgage guaranty insurance” until Dec. 31.

“While the company has requested extensions, there can be no assurance that the GSEs will grant them or that the GSEs will not revoke the PMAC approvals prior to Dec, 31,” the filing stated.

PMI expected to conduct business through PMAC in a growing number of states.

“If the company is unable to satisfy any of the GSE eligibility requirements for PMAC, if the GSEs do not extend PMAC’s approvals, or if the GSEs revoke PMAC’s approvals, the company would be unable to offer mortgage insurance through PMAC,” the filing said. “If this were to occur, the company would not be able to offer mortgage insurance through its combined insurance subsidiaries in all fifty states.”

The SEC filings said that a settlement in a federal shareholder derivative lawsuit was approved on July 13 by the U.S. District Court for the Northern District of California.

The federal court also directed parties in a state shareholder derivative suit to seek dismissal with prejudice pursuant to the terms of a March settlement.

PMI said it is working to raise capital, but market conditions are limiting its ability to do so.

“If we are not able to raise needed capital, we likely will be required, at a minimum, to cease writing new business.” PMI said. “In such an event, our control of PMI Mortgage Insurance would be limited and it is possible that a receiver would be appointed and would acquire exclusive power of management and control of PMI Mortgage Insurance.”

The disclosure from the mortgage insurance giant had its shares plummeting 58 percent today to 37 cents. During the past year, shares had traded at more than $4.