Recently, Radian Group Inc.’s (RDN) mortgage insurance subsidiary, Radian Guaranty Inc. inked a deal with Freddie Mac to reduce its claims exposure. Virginia-based Freddie Mac, also known as Federal Home Loan Mortgage Corporation (FHLMC) is a government-sponsored entity that buys mortgages on the secondary market and sells them to investors in the open market.
Philadelphia-based Radian Group offers private mortgage insurance and risk mitigation products to mortgage lenders throughout the nation.
The deal relates to a group of 25,760 first-lien mortgage loans held by Freddie Mac and insured by Radian Group that became delinquent as of Dec 31, 2011. The agreement allows future treatment of these loans, including claim payments, loss mitigation, activity and insurance coverage, thereby eradicating Radian Group’s claims exposure.
The company intends to mitigate its legacy risks through the agreement. The aforementioned deal is expected to reduce the number of primary delinquent loans by 12.6% and thus reduce legacy risk for Radian Group.
With the recent agreement, Radian Guaranty’s total exposure on this group of loans, including loans that are currently re-performing, totals to $840 million. Radian Group had previously paid $370 million of claims on these loans.
The company has now paid nearly $255 million to Freddie Mac to cover claim exposure on these loans. Towards loss mitigation, Radian Group also deposited collateral of $205 million. However, if the loss mitigation activities do not sum up to $205 million, the remaining amount will be paid to Freddie Mac. As of Jul 31, the total amount of claim denials in Radian Group’s business was $10 million.
As per company expectations, the total loss to be incurred by Radian Group in the third quarter of 2013 is around $20 million. Going forward, this is expected to be offset by the reduction of insured losses that will result from the reduction of claims exposure through the deal.
Radian Group currently carries a Zacks Rank #3 (Hold). Among other insurers, AXA Group (AXAHY), Eastern Insurance Holdings Inc. (EIHI) and Kemper Corp. (KMPR) carry a favorable Zacks Rank #1 (Strong Buy).
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