Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. RADIAN GROUP INC (890926) 10-Q published on May 09, 2018 at 4:25 pm
Reporting Period: Mar 30, 2018
In April 2018, we were notified that the JCT had no objection to the terms of the settlement agreement and that the IRS is working toward finalizing the settlement, which we now expect to occur within the next several months. While the expected impact of the final settlement will reduce our available holding company liquidity by approximately $35 million, during the second quarter of 2018 we expect to recognize a net positive impact to tax expense of approximately $30 million. This estimated benefit is primarily related to the lower than expected interest accrued on the tax deficiency and the impact of the remeasurement of our deferred taxes due to the enactment of the TCJA during the fourth quarter of 2017. This estimated benefit amount does not include any potential related benefit from the impact on our state or local uncertain tax positions. However, over the next twelve months, it is reasonably possible that we could record a material reduction to these liabilities for unrecognized tax benefits.
Ocwen Loan Servicing, LLC and Homeward Residential, Inc. (collectively, “Ocwen”) filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania against Radian Guaranty (the “Complaint”) alleging breach of contract and bad faith claims and seeking monetary damages and declaratory relief. Ocwen has also initiated similar legal proceedings against several other mortgage insurers. On December 17, 2016, Ocwen separately filed a parallel arbitration petition against Radian Guaranty before the American Arbitration Association (“AAA”) asserting substantially the same allegations (the “Arbitration”). Ocwen’s filings together listed 9,420 mortgage insurance certificates issued under multiple insurance policies, including pool insurance policies, as subject to the dispute. On June 5, 2017, Ocwen filed an amended complaint and an amended petition (collectively, the “Amended Filings”) with both the court and the AAA, respectively, together listing 8,870 certificates as subject to the dispute. In December 2017 and January 2018, Ocwen and Radian Guaranty filed motions for partial summary judgment on a small number of bellwether certificates selected from the certificates subject to the court proceedings (“Bellwether Certificates”). On February 1, 2018, the trial judge issued an Order and Memorandum decision granting in part and denying in part both parties’ motions for partial summary judgment (subsequently clarified by Orders of March 5 and 29, 2018), and ordering the parties to proceed to trial on certain claims regarding a portion of the Bellwether Certificates. On April 11, 2018, the parties entered into a confidential agreement with respect to all certificates subject to the dispute. The confidential agreement resolved certain categories of claims involved in the dispute and, on April 12, 2018, the parties filed a stipulation of voluntary dismissal of the federal court proceeding and the trial judge issued an Order dismissing all claims and counterclaims subject to the parties’ agreement. Radian Guaranty was not required to make any payment in connection with this confidential agreement. Pursuant to the confidential agreement, the parties: (1) dismissed the federal court proceeding; (2) narrowed the scope of the dispute to Ocwen’s breach of contract claims seeking payment of insurance benefits on approximately 2,500 certificates that Ocwen was previously pursuing through the Amended Filings; and (3) agreed to resolve the remaining dispute through the Arbitration. Radian Guaranty believes that Ocwen’s allegations and claims in the legal proceedings described above are without merit and legally deficient, and plans to defend these claims vigorously. We are not able to estimate a reasonably possible loss, if any, or range of loss in this matter because of the preliminary stage of the Arbitration.
More recently, in response to price changes by other private mortgage insurers, in May 2018 we announced additional changes, effective June 2018, that will provide increased risk-based granularity to our pricing across most products and better align with industry trends. These pricing changes result in a decrease in our Monthly Premium Policy rates and an increase in our Single Premium Policy rates for mortgage insurance, and include our introduction of rate adjustors related to multi-borrower loans and loans with a debt-to-income ratio greater than 45%. Based on Radian’s recent mix of NIW, after taking these changes into account, our overall premium rate decrease would have been approximately 6%, which includes the new rate adjustors that would have impacted approximately 50% of new business. Radian expects this new pricing (including the impact of our reinsurance transactions) will, over the life of the policies, produce a blended return on required capital on our new business on an unlevered basis (i.e., after-tax underwriting returns plus projected investment income) in the mid-teens. This projected return incorporates our understanding of the proposed changes to the PMIERs, which are expected to be effective no earlier than the end of this year.
During the first quarter of 2018, Freddie Mac announced the launch of a pilot program, Integrated Mortgage Insurance (“IMAGIN”) as an alternative way for lenders to sell to Freddie Mac loans with LTVs greater than 80%. This investor-paid mortgage insurance program, in which insurance is provided directly to Freddie Mac, represents an alternative to traditional mortgage insurance that is provided to individual lenders. Under the IMAGIN program, insurance is being provided by a third party which, in turn, is expected to cede the risk to a panel of reinsurers. The participants in the IMAGIN structure are not subject to compliance with the PMIERs, which may create a competitive disadvantage for private mortgage insurers. In its current form, we do not expect that the IMAGIN program will have a material impact on our financial performance or business prospects. In addition to its current focus on lender-paid Single Premium Policies, we believe there are significant challenges to the long-term sustainability of the program, including that the structure relies on a reinsurance market that, in contrast to traditional mortgage insurance, may not be permanently committed to serving the first-loss mortgage insurance market. However, if this pilot program or other alternatives to traditional private mortgage insurance were to expand and become broadly accepted alternatives to traditional private mortgage insurance, they could reduce the demand for private mortgage insurance in its traditional form and could negatively affect our financial results and business prospects.
Market Credit Characteristics. NIW on mortgage loans with LTVs greater than 95% has been increasing throughout the industry, although during the first quarter of 2018 we observed a slowing in the pace of increase. In general, borrowers who purchase a home with mortgage insurance tend to have higher LTVs than borrowers who refinance with mortgage insurance. With purchase volume becoming a larger proportion of total originations and access to credit continuing to steadily expand, the proportion of higher-LTV lending in the market has increased. Additional factors contributing to an increase in the industry’s NIW on mortgage loans with LTVs greater than 95% include: (i) GSE program enhancements and guideline changes, including Fannie Mae’s HomeReady program and Freddie Mac’s Home Possible and Home Possible Advantage programs, that are designed to make home ownership more affordable for low- to moderate-income borrowers and (ii) recent lender response to market demands, particularly in light of increasing demand from first-time home buyers. As a result of all of these factors, home purchases by first-time home buyers, who traditionally require mortgage loans with higher LTVs and may have higher debt-to-income ratios, are becoming an increasingly significant portion of the total market. In late 2017 and during the first quarter of 2018, due in part to changes in GSE guidelines that increased acceptable debt-to-income limits, we also observed a material increase in the volume of loans to borrowers with debt-to-income ratios greater than 45% throughout the private mortgage insurance industry. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF” in our 2017 Form 10-K for additional information about the GSE programs.