FBR & Co. (FBRC), the investment bank run by Chief Executive Officer Richard J. Hendrix, raised $550 million this week to fund NMI Holdings Inc., a planned U.S. mortgage insurer.
FBR underwrote a private offering of NMI shares and holds a stake of less than 5 percent, said Joseph Kavanagh, a senior managing director at the Arlington, Virginia-based firm. NMI was initially formed as a subsidiary of FBR, whose fee on the sale may almost match its total revenue in the first quarter.
Investors in the San Francisco-based insurer include “well-known, well-respected names,” none owning more than 15 percent, Kavanagh said, declining to name the institutional clients. NMI still needs to be approved by Fannie Mae or Freddie Mac, the government-run mortgage financers that are the main customers of such guarantors.
“We feel very optimistic about the impact this company and this management team is going have on the U.S. housing system,” Hendrix said in a telephone interview. The deal will “help NMI get capital back into the housing market in a way that ultimately should literally benefit individual homeowners.”
NMI, whose insurance unit is called National Mortgage Insurance, is being led by Chief Executive Officer Brad Shuster. He oversaw PMI Group Inc. (PPMIQ)’s foreign units before U.S. home loans drove that guarantor into bankruptcy last year.
Mortgage insurance is typically required for debt exceeding 80 percent of a property’s value, paid for by consumers and picked by loan originators. The protection covers some or all of foreclosure losses for lenders or Fannie Mae and Freddie Mac, which guarantee bonds backed by home loans. Radian Group Inc. (RDN), American International Group Inc. (AIG)’s United Guaranty unit and MGIC Investment Corp. (MTG) led in policy sales last year.
NMI would be the second entrant to the industry since a U.S. housing bubble began to burst in 2006, pushing three competitors out of the business.
Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co (JPM), private- equity firm Pine Brook and reinsurer PartnerRe Ltd. are among backers of the industry’s other startup, Essent Guaranty Inc. The Radnor, Pennsylvania-based firm raised $600 million in 2009 and 2010 and began writing policies last year, providing $3.2 billion of coverage, according to newsletter Inside Mortgage Finance.
The depletion of 80 percent of the capital of existing insurers since 2007 and retreat of the government’s Federal Housing Administration amid dwindled reserves is creating opportunities for new competitors, Kavanagh said. At the same time, reforms of Fannie Mae (FNMA) and Freddie Mac may shrink the insurers’ role in the market in the future.
“That’s a risk investors were willing to take,” Hendrix said. “There’s a general belief there’s going to be a meaningful role for private mortgage insurance going forward no matter how that restructuring gets done.”
For FBR, which was called Friedman Billings Ramsey Group and specialized in underwriting mortgage lenders and other specialty finance firms during the credit bubble, the NMI deal “is important both financially but also in terms of reputation and our brand,” Hendrix said.
That’s because “transactions like this, that are built around big important themes, are things we pride ourselves on,” he said.
FBR’s placement fee was an estimated $38.3 million, according to a Securities and Exchange Commission filing. The firm this week reported revenue last quarter of $39.1 million. The “fee is contingent and will not be earned unless and until all of the necessary agency and regulatory approvals have been granted,” Nathaniel Garnick, a spokesman, said in an e-mail.