MGIC Reaches Preliminary Freddie Mac Agreement

MGIC Investment Corp. (MTG), the mortgage insurer that breached regulatory capital limits, reached a preliminary deal with Freddie Mac to resolve a coverage dispute that threatened to prevent the firm from backing some loans.

MGIC will make payments to Freddie Mac over four years under the arrangement, which requires approval from boards of both firms, the Milwaukee-based insurer said today in a statement. The firms must still agree on matters “significant to final resolution,” according to the statement.

MGIC faced a deadline today to reach an agreement with Freddie over how much coverage the firm must provide on groups of loans it insured for the government-sponsored mortgage bond guarantor. Freddie had said the limit should be $535 million higher than MGIC’s target. That would have increased the firm’s losses in the first six months of 2012 by $85 million, MGIC said in a quarterly filing.

“Any settlement of our dispute with Freddie Mac regarding the interpretation of certain pool policies will negatively impact our statutory capital and, depending on the amount, could exacerbate materially the current non-compliance with capital requirements,” MGIC said in the August filing.

MGIC hadn’t set aside reserves for a settlement with Freddie as of Aug. 2, Chief Executive Officer Curt Culver said on a conference call with analysts that day.

State Regulators

The insurer said in August it had breached the 25-to-1 ratio of risk relative to capital that some state regulators require to permit the company to sell new coverage. It deferred payment on convertible bonds in September to conserve capital. MGIC has received waivers of the risk limit to allow it to keep selling policies in some states.

MGIC has declined 54 percent this year as losses from soured home loans drained capital and threatened the firm’s ability to sell new coverage. Rivals including Old Republic International Corp. (ORI), PMI Group Inc. and Triad Guaranty Inc. have been pushed from selling new coverage by mounting losses.

The company reported a net loss in the first six months of this year of $293.4 million. It said in today’s statement that third-quarter results are scheduled to be announced Nov. 9. The firm had $6 billion of cash and investments as of June 30, down from $7.8 billion a year earlier.

To contact the reporter on this story: Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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