June 19 (Bloomberg) -- Triad Guaranty Inc. became the first mortgage insurer to stop selling new policies after the collapse of talks with Lightyear Capital LLC to form a new company with Triad employees. The insurer plunged 40 percent in Nasdaq Stock Market trading.

The decision to halt sales was prompted in part by Freddie Mac's suspension of the company as an approved insurer, Winston- Salem, North Carolina-based Triad said today in a statement. Freddie Mac, the second-largest buyer of U.S. home loans, refused an appeal of that decision, the company said.

The worst housing slump since the Great Depression has led to record losses at mortgage insurers, which reimburse lenders when homeowners default. Triad, which traded above $60 a share in 2005 as the housing market boomed, lost money in the last three quarters, and closed at $1.22 at 4 p.m. in New York.

Triad's decision to quit the business and cut about 100 jobs was ``based on a candid and thorough evaluation of our current situation and how to best serve the interests of Triad and its customers and policyholders going forward,'' Chief Executive Officer Mark Tonnesen said in the statement.

Triad may now enter ``runoff,'' continuing to pay claims and book profits or losses from previously sold policies. The company would cease operation when the last of its existing policies expire.

Freddie Mac

``We will stop buying loans that have Triad insurance on July 15,'' said Freddie Mac spokesman Brad German. Existing mortgages with Triad insurance are unaffected, he said. Freddie Mac and Fannie Mae, the largest buyer of home loans, require insurance on mortgages where the borrower puts down less than 20 percent.

Amanda Kiely, a spokeswoman for New York-based Lightyear, declined to comment.

Lightyear, founded by former Paine Webber Group Inc. Chairman Donald Marron, said in May that it was prepared, along with unnamed partners, to spend $400 million to form a new mortgage guarantee company. Triad said at the time that some of its managers and many of its employees might join the new venture. The effect on Triad shareholders wasn't specified.

``Without the formation of a new mortgage insurer, Fitch will monitor whether Triad will be able to retain the necessary operating staff to manage the runoff,'' Fitch ratings said today in a statement. Fitch grades TGIC's claims-paying ability ``BB.''

MGIC, Radian

Triad, which had about 270 employees as of Feb. 29, was the smallest of the seven private U.S. mortgage insurers, according to 2007 data from Inside Mortgage Finance. The three largest, MGIC Investment Corp., PMI Group Inc. and Radian Group Inc., have each submitted remediation plans to Freddie Mac after their financial-strength ratings were downgraded below the mortgage finance company's previous minimum. Standard & Poor's cut their ratings in April, saying the companies may lose money through next year.

MGIC fell 5.6 percent in New York Stock Exchange composite trading. The Milwaukee-based company has dropped 85 percent in the past 12 months. PMI, based in Walnut Creek, California, slipped 8 percent and is down 92 percent in the last year. Philadelphia-based Radian tumbled 13 percent and has lost about 96 percent of its market value.

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

Last Updated: June 19, 2008 16:29 EDT