DISASTER SHAKES PRIVATE INSURERS
Know your credit risk. Don't assume that a particular issue of mortgage-backed securities is risk-free just because it is being sold by a prestigious Wall Street firm. Look behind the paper.
That is what many investors and observers are saying about the mortgage-backed securities market after a year of unpleasant surprises which rocked the private mortgage insurance industry.
The new wariness stems largely from the collapse of a relatively obscure real estate syndicator last August. The failure of Equity Programs Investment Corporation, or EPIC, which defaulted on more than $1 billion of mortgage instruments, sent shock waves through the system and resulted in what some called the most serious threat to the mortgage insurance industry since it came into existence. It caused red faces at Salomon Brothers, the most prominent investment firm selling EPIC securities, and serious financial problems at a leading mortgage insurance firm.
However, in a sense, EPIC was only part of a larger problem -- mainly caused by loose underwriting standards in recent years -- that has led to a surge in mortgage delinquencies and foreclosures, despite a generally favourable economic environment. The result has been four consecutive years of losses for private mortgage insurers -- some of them owned by leading US corporations -- along with constraints on their capital and their ability to write new business.