July 16 (Bloomberg) -- MGIC Investment Corp., PMI Group Inc. and competing U.S. mortgage insurers reeling from record claims may have to absorb even higher loss rates from bad home loans, Fitch Ratings said.

About 70 percent of the industry's policies cover loans issued from 2005 through 2007 when mortgage and insurance underwriting standards were lax, leading to progressively higher default rates, Fitch said. Mortgage insurers pay lenders when borrowers default and foreclosure fails to recoup costs.

``The mortgage insurance industry's troubles are not over and may, in fact, get worse,'' Fitch said in a report today. The industry ``underestimated both the scope and severity of the decline in residential mortgage markets that became increasingly acute in 2007.''

Home values dropped a record 15.3 percent in April from a year earlier in 20 metropolitan areas, the S&P/Case Shiller home- price index showed on June 24, making it harder for borrowers to refinance adjustable-rate loans. Foreclosure filings rose 53 percent in June from a year earlier, according to RealtyTrac Inc.

About a third of the industry's total coverage outstanding is for 2007 mortgages, and homebuyers borrowed at least 95 percent of the property's value on most of those loans, according to Fitch. Borrowers with prime credit scores became delinquent in their first year on 2007 loans at more than twice the rate of their peers who took out mortgages in 2006.

MGIC, the largest U.S. mortgage insurer, has declined more than 75 percent this year after posting three consecutive quarterly losses. The Milwaukee-based company is scheduled to announce second-quarter results tomorrow. No. 2 PMI, based in Walnut Creek, California, has declined about 86 percent.

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

Last Updated: July 16, 2008 14:25 EDT