Sept. 5 (Bloomberg) -- MGIC Investment Corp., the biggest U.S. mortgage insurer, abandoned talks to acquire Radian Group Inc. for about $2.4 billion amid the worst real estate slump in 16 years.

MGIC shares have plunged 57 percent since the Milwaukee-based company announced plans in February to acquire Radian and control more than a third of the U.S. mortgage insurance market. The companies said today in a statement that it's ``in their best interests to remain independent.'' Radian gained in New York Stock Exchange composite trading. MGIC declined.

The deal began to unravel last month, and MGIC sued Radian Aug. 20, saying Radian wasn't providing details about its businesses that may be ``particularly susceptible'' to turmoil in credit markets. MGIC also said it was reconsidering the merger as rising homeowner delinquencies threatened lenders that the companies protect. Last month Radian, the third-largest mortgage insurer, said that MGIC was obligated to complete the deal.

``They may have concluded their only option was to walk away with a friendly goodbye,'' Rob Haines, a debt analyst at New York- based CreditSights Inc., said of Radian.

All outstanding litigation between MGIC and Philadelphia-based Radian has been withdrawn, and no payments were made to end the merger, the companies said in their statement. The deal, scheduled to be completed in the fourth quarter, was valued at $4.9 billion when it was announced Feb. 6.

`It Dragged On'

``It appeared increasingly unlikely to us as to where this merger was headed,'' Radian Chief Executive Officer Sanford Ibrahim said in an interview. ``The longer it dragged on, we really wouldn't be serving our shareholders well.''

Instead, Ibrahim chose to focus resources on taking advantage of rising demand for mortgage insurance and retaining employees, he said. The insurer is receiving ``significant'' new business, he said.

Elements of the deal that would have added immediately to earnings, including a planned hybrid debt offering to help finance a share repurchase, were lost as the credit markets deteriorated, Michael Zimmerman, MGIC's chief of investor relations, said in an interview.

Fitch Ratings lowered its rating of Radian's mortgage insurance units' claims-paying ability one notch to ``AA-'' after the close of regular trading in U.S. markets.

``It's a strong company with a strong ability to pay claims, but it's been diminished,'' by the worsening housing market, said Thomas Abruzzo, an analyst at Fitch in New York.

Fitch Downgrade

Fitch also cut the financial strength rating two notches, to ``A+'' for the Radian units that insure investments in municipal bonds and other securities. Without additional capital beyond the $100 million Radian said today it would put into the business, Fitch likely will cut those units' ratings further, Abruzzo said.

Standard & Poor's said it's reviewing its ``AA'' rating on Radian's mortgage insurance business.

If the mortgage insurance ratings slip below AA-, Haines said, it would ``severely'' damage sales and probably force Radian to raise new capital or sell itself.

The mortgage insurance business ``remains intact and compelling'' while facing ``increasing but manageable near-term losses,'' Ibrahim said in a conference call. The company anticipates default rates to continue at present levels for another 18 months before reverting to historical norms, he said.

Sherman Sale Anticipated

MGIC and Radian are in the process of selling about half their stake in Sherman Financial Group LLC. Each owns about 41 percent of Sherman, which invests primarily in distressed consumer debt. Radian expects to get about $260 million, said Chief Financial Officer Robert Quint. MGIC declined to discuss terms, saying the coordinated sale will likely be completed in the next several weeks. The proceeds originally were to have helped fund share buybacks for the merged company.

Radian shares gained 16 cents, or 0.9 percent, to $18.27 after trading as low as $15.80 before Ibrahim's conference call and as high as $21.16 after. MGIC fell 29 cents, or 1 percent, to $30.05.

The number of Americans entering into contracts to buy previously owned homes plunged in July by the most since records began in 2001, worsening the two-year housing recession, the National Association of Realtors said today.

Defaults Increase

Radian's shares fell 73 percent since the deal was announced in February as mortgage insurers paid more to bail out lenders from bad loans. In July, U.S. lenders sent 179,599 notices of default, scheduled auctions or bank repossessions, almost twice as many as a year earlier, according to Irvine, California-based RealtyTrac Inc.

The agreement would have been worth $2.4 billion at yesterday's closing MGIC price, based on 80.4 million Radian shares outstanding and 0.97 MGIC shares for every Radian share. Combining the companies would reduce personnel and computer costs, MGIC and Radian said in February.

MGIC partly attributed its reluctance to complete the purchase to the potential for losses from an 11-year-old joint venture it co-owns with Radian. The venture, Credit-Based Asset Servicing and Securitization LLC, or C-Bass, buys delinquent loans, aiming to get collections back on schedule and sell the debt at a profit. Both insurers own a 46 percent stake and said in July their investments, each valued at more than $500 million in June, may have become worthless.

Investors who buy mortgages are reluctant to bid as the share of subprime loans entering foreclosure rose to a five-year high of 2.43 percent in the first quarter, Washington-based Mortgage Bankers Association said in a June 14 report. The trade group reports second-quarter data tomorrow.

C-Bass Joint Venture

The merger also anticipated the sale of a portion of C-Bass to help fund the share buyback, boosting earnings per share. The joint venture's woes further complicated a possible merger because MGIC may get a full tax benefit from C-Bass's impairment, while Radian may not, MGIC said in the suit.

Radian might be able to sell its stake in C-Bass based on value in the unit's Litton Loan Servicing business, said Quint.

``Likelihood of finding a C-Bass buyer and extracting any value on our equity stake is de minimis,'' or minimal, MGIC's Zimmerman said.

A measure of the supply of homes for sale in July rose to the highest since October 1991, according to the National Association of Realtors. The median home price dropped 0.6 percent to $228,900 from an all-time high of $230,200 a year ago. Lower home values make it difficult for struggling borrowers to recover their debt.

Profit Declines

Second-quarter profit plunged at both companies, falling 49 percent to $76.7 million at MGIC and 86 percent to $21.1 million at Radian as the defaults they protect against surged, especially in California and Florida.

While claims have increased, mortgage insurers are selling more coverage as lenders seek to reduce their risk and increase their chances of selling loans to investors. The industry issued 42 percent more policies in the first seven months of the year than during the same period in 2006, said Jeff Lubar, spokesman for the Mortgage Insurance Companies of America, on Aug. 31.

As Radian shares fell, Canadian mutual fund manager AIC Ltd. and hedge fund manager D.E. Shaw & Co. built their stakes in the insurer. AIC more than doubled its stake to 13 percent as of Aug. 16, the company said in a regulatory filing yesterday. D.E. Shaw said it almost quadrupled its position in Radian to 5.3 percent of the shares outstanding as of Aug. 7.

Credit-Default Swaps

Credit-default swaps on Radian, used to speculate on the company's ability to repay its debt, almost doubled after the joint announcement today to as high as 875 basis points, according to broker Phoenix Partners Group. The contracts rebounded to 490 basis points in later trading, Phoenix prices show. A basis point is 0.01 percentage point. An increase signals deterioration in the perception of credit quality.

Credit-default swaps on MGIC fell to 170 according to Phoenix. They closed yesterday at 194, according to CMA Datavision in London.

MGIC insured $57.5 billion of new mortgages in 2006, giving it a 22 percent market share in the U.S., according to Inside Mortgage Finance. Walnut Creek, California-based PMI Group Inc. insured $52.2 billion, or 20 percent, followed by Radian's $40.1 billion, or 15 percent.

PMI shares dropped $1.07, or 3.3 percent, to $31.17. They fell 34 percent this year.

MGIC was represented in the deal by Goldman Sachs Group Inc. Radian was represented by Lehman Brothers Holdings Inc. Messages

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

Last Updated: September 5, 2007 17:58 EDT