June 5 (Bloomberg) -- MGIC Investment Corp. and PMI Group Inc., the two largest U.S. mortgage insurers, had their financial strength grades cut by Fitch Ratings based on the sale of coverage for risky loans in 2007.

Last year ``will likely prove to be one of the worst underwriting years in the modern history of the U.S. mortgage industry,'' Fitch said in a statement today. Mortgage insurers ``aggressively courted new business throughout 2007.''

Newly delinquent mortgage borrowers outnumbered those who caught up on overdue payments by two to one in April, according to the Washington-based Mortgage Insurance Companies of America, a sign that nationwide efforts to help homeowners avoid default may be failing. Milwaukee-based MGIC and PMI have lost money in each of the past three quarters, sending their market value down more than 80 percent from a year ago.

Foreclosure filings surged 65 percent and bank seizures more than doubled in April compared with a year earlier as rates on adjustable mortgages increased, according to Irvine, California- based data provider RealtyTrac Inc. Mortgage insurers help lenders recoup when homeowners default and foreclosure proceeds don't cover costs.

Fitch lowered its rating on MGIC's mortgage insurance subsidiaries in the U.S. and Australia to A+ from AA. Walnut Creek, California-based PMI had its U.S. and European units cut to A+ from AA, while its Australian insurer had its financial strength rating downgraded to AA- from AA. The rating measures an insurer's claims-paying ability.

Old Republic

Standard & Poor's in April cut the ratings on units of MGIC, PMI and No. 3 Radian Group Inc., citing the prospect of underwriting losses until 2010. Fitch doesn't have ratings on Philadelphia-based Radian.

Old Republic International Corp.'s mortgage insurer was cut to AA- from AA by Fitch, which said the parent's ability to support the unit has been diminished. The Chicago-based insurer also provides commercial coverage and title insurance.

``Starting in mid-2007 the underwriting standards were strengthened'' in the industry, Al Zucaro, Old Republic's chief executive officer, said in an interview today. ``It wasn't until earlier this year that we started to see what are expected to be beneficial effects.''

`Sky is Not Falling'

Old Republic's mortgage insurer has the resources to pay claims, and should that change, ``we will put capital in,'' he said. ``The sky is not falling.''

Genworth Financial Inc., the Richmond, Virginia-based life insurer spun off by General Electric Co., may also have the ratings of its mortgage business cut, Fitch said.

MGIC spokeswoman Katie Monfre declined to comment. PMI spokesman Nate Purpura and Genworth spokesman Al Orendorff didn't immediately return calls seeking comment.

Freddie Mac, the second-largest provider of money for U.S. home loans, has continued to purchase loans covered by mortgage insurers that don't meet its previously required minimum financial strength ratings. Freddie Mac, based in McLean, Virginia, is evaluating plans submitted by MGIC, PMI, Radian and Triad Guaranty Inc. stating how they plan to restore their ratings.

Fannie Mae, the largest mortgage purchaser, also continues to accept loans covered by downgraded insurers.

Triad, based in Winston-Salem, North Carolina, is rated BB by Fitch.

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

Last Updated: June 5, 2008 18:43 EDT