MGIC – An Opportunity Through Mortgage Credit Exposure

By REIT Analyst:

While I usually focus on mortgage REITs, which I can model quite accurately, I recently have taken a close look at mortgage insurance. Indeed, I realized I could model their business reasonably well, and it now appears to me that MGIC Investment Corporation (NYSE:MTG) offers a mispriced and attractive exposure to mortgage credit.

My analysis tells me that factoring in the next 10 years of cash flows, at 10% yield, MTG is worth about 2.1x its current market price, even assuming the business does not grow. Basically, relative to the actual risks of defaults barring a mortgage meltdown, mortgage insurance (“MI”) fees are large compared to the actual losses one can reasonably expect.

MGIC and the mortgage insurance business

MGIC is in the business of insuring mortgage credit, essentially for the GSEs (Fannie Mae and Freddie Mac). MGIC collects about 55bps of the mortgages’ balance per year (which the servicer


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