Oct. 31 (Bloomberg) -- Defaults by U.S. homeowners with private mortgage insurance jumped by 22 percent last month after house prices fell the most in at least six years, an industry report said.

The number of insured borrowers falling more than 60 days behind on their payments climbed to 54,699 in September from 44,791 a year earlier, according to monthly data from the Washington-based Mortgage Insurance Companies of America. The defaults represented a 4.9 percent increase from a revised August number, while 2.9 percent fewer loans returned to good standing.

A surge in home foreclosures is sapping profit at mortgage lenders and insurers including MGIC Investment Corp., the biggest, and No. 2 PMI Group Inc., which this month reported their first quarterly losses as public companies. Borrowers who don't have a 20 percent down payment often must buy the insurance, adding to their monthly costs, to protect lenders from losses if they default.

``Things are going from bad to worse,'' said Ajay Rajadhyaksha, head of fixed-income strategy in New York at Barclays Capital Inc. ``Overleveraged borrowers are meeting falling home prices.''

Home prices in 20 U.S. metropolitan areas dropped 4.4 percent in the 12 months that ended August, the most since 2001, according to data from the S&P/Case-Shiller home-price index. Falling home prices make it harder for borrowers to refinance and for lenders to recover their loans in a foreclosure.

September `Deterioration'

``The speed and the depth of the deterioration we saw in the third quarter, and in particular the month of September, was greater than we had expected,'' said PMI Chief Executive Officer Stephen Smith in a conference call yesterday after reporting a net loss of $86.8 million.

Total U.S. claims costs, including money set aside for future defaults, increased fivefold to $348.3 million, Walnut Creek, California-based PMI said. MGIC's claims costs tripled, and the company predicted on Oct. 17 that it won't be profitable in 2008.

PMI fell 70 cents, or 4.2 percent, to $16.03 at 4:07 p.m. in New York Stock Exchange composite trading. The stock has dropped 66 percent this year. MGIC, based in Milwaukee, rose 19 cents, or 1 percent, to $19.36, and is down 69 percent from its Dec. 31 close.

PMI said it is facing increasing claims on loans made to borrowers who can't keep up with higher payments as their two-year ``teaser'' rates expire. The company stopped insuring such loans last year.

Industrywide, the standard to which lenders and insurers held borrowers reached its nadir in 2006, suggesting that the default rate will continue to rise, said Michael Grasher, a senior analyst at Piper Jaffray & Co. in Chicago.

Borrowers `Walking Away'

``We still don't know how bad it's going to be,'' Grasher said. ``As these mortgages are resetting at higher rates, people are just saying `no thank you' and walking away.''

Even as claims soar, mortgage insurers are selling more coverage as lenders seek to lower their risk and make their loans more attractive to investors. Association members issued policies to 151,355 homeowners last month, 59 percent more than during the previous September. Defaults in August were revised to 52,129 from 58,441, the association said.

The group's data is drawn from six of the seven biggest U.S. mortgage insurers, excluding only Philadelphia-based Radian Group Inc., the third-largest, which isn't a member of the association. Radian is scheduled to release third-quarter results tomorrow.

MGIC sold shares to the public in 1991. PMI followed four years later.

-- With reporting by Hugh Son in New York. Editor: Kraut (weg/rik/psg/jsp/rau/weg)

To contact the reporters on this story: Erik Holm in New York at eholm2@bloomberg.net; Josh P. Hamilton in New York at jphamilton@bloomberg.net.

Last Updated: October 31, 2007 20:15 EDT