JPMorgan, Goldman Seek Profit Amid Mortgage Insurer 'Distress'
By Jamie McGee

Oct. 8 (Bloomberg) -- JPMorgan Chase & Co. and Goldman Sachs Group Inc. are investors in a firm that agreed to buy assets and hire workers from money-losing mortgage insurer Triad Guaranty Inc. to gain a foothold in the housing market.

Essent Guaranty Inc. will pay as much as $30 million in cash for software and other assets, Winston-Salem, North Carolina-based Triad said yesterday in a statement. Triad, which stopped selling mortgage policies last year when capital ran short, won't be transferring claims obligations to Essent.

Essent has the backing of some of the world's largest banks while mortgage insurers including American International Group Inc. and Genworth Financial Inc. are selling assets amid losses. Essent is the first newcomer to the U.S. mortgage-guaranty business since the U.S. housing collapse, leaving it unburdened by policies sold in 2005 and 2006 before the recession.

It "is an industry that has been in distress," said Steven Schwartz, an analyst at Raymond James Financial Inc. "New business written today is expected to be very profitable."

Essent won $500 million in equity financing from investors including Goldman Sachs and JPMorgan, both based in New York, private-equity firm Pine Brook Road Partners, and Bermuda-based reinsurers PartnerRe Ltd. and RenaissanceRe Holdings Ltd.

Essent's move is "very comparable" to Warren Buffett starting Berkshire Hathaway Assurance Corp. to guarantee municipal bonds as MBIA Inc. and Ambac Financial Group Inc. faltered, said Matt Howlett, an analyst at Fox-Pitt Kelton Inc. in New York.

Struggling

"The other guys are struggling with capital levels," Howlett said. "A new guy that can raise capital, can acquire the platform, can develop the relationships, can clearly go out and capture" business.

Radian Group Inc., the third-largest U.S. mortgage insurer, said it has tightened standards to eliminate borrowers more likely to fall behind on payments. The Philadelphia-based insurer returned to profitability in the three months ending June 30, after posting two straight quarterly losses.

"Credit standards and stricter underwriting may have caused a decrease in volume in 2009," Chief Executive Officer Sanford Ibrahim has said. "They have also generally resulted in better-qualified borrowers and higher-quality loans."

The industry is seeing increased competition from the Federal Housing Administration, which has boosted its market share since 2008, CreditSights Inc. analyst Robert Haines wrote Oct. 6 in a note to clients.

Evaluating the Market

"While we are not calling for a complete demise of the mortgage-insurance sector, we have seen some signs that not all" current mortgage insurers are needed to write new policies, Haines said.

Mortgage insurers pay lenders when homeowners fail to meet their obligations and foreclosure doesn't cover costs. Borrowers may be required to purchase the coverage if they pay less than 20 percent of a home's value when they obtain a mortgage.

Schwartz at Raymond James said Essent may be entering the business at the right time.

"Rates at the mortgage insurers that are actually writing new business have gone up considerably," he said.