Mortgage Insurance Stocks Move Lower Amid Economic Concerns

NEW YORK (Dow Jones)--Mortgage insurance stocks were in the red Monday, weighed down by continued worries about the economy, though the rest of the insurance sector managed to buck the trend as Sandler O'Neill issued a positive second-quarter outlook for property/casualty insurers.

Among the insurance sector's worst performers Monday was mortgage insurer Radian Group Inc. (RDN), which fell 10% recently to $2.49. Fox-Pitt analyst Matthew Howlett noted in an interview, "mortgage insurers are more levered to economic fundamentals" such as jobs and housing. "People are getting more skeptical on housing and the default cycle," Howlett said.

Among other mortgage insurers, PMI Group Inc. (PMI) slid 3.7%, to $1.80, and MGIC Investment Corp. (MTG) dropped 1.7%, to $3.97. Struggling insurance giant American International Group Inc. (AIG), which has mortgage insurance operations, dropped 12%, to $16.03.

Several bond insurers were also down Monday, as Amabac Financial Group Inc. (ABK) fell 3%, to 85 cents, and Assured Guaranty Ltd. (AGO) slumped 2.2%, to $11.79. But MBIA Inc. (MBI) rose 1.8% to $4.03.

Most other insurers were also in the black. The Dow Jones U.S. Insurance Index was recently up 1.2%.

Sandler O'Neill issued a note to clients Monday predicting second-quarter book values for most of the insurers it covers will have had "significantly positive book value growth during the quarter." The firm projected the property/casualty group will show average growth of 9.4%, thanks to equity and bond market increases during the quarter.

The firm also said it expects "a fairly positive" earnings season for the property/casualty insurers. However, the firm noted there is a big unknown for the quarter: how much in favorable reserves will have been released. Noting 2008 and first-quarter 2009 results benefited from favorable reserve releases, the firm said "we believe that these favorable reserve releases can't last forever and expect favorable development to decline significantly over the course of 2009."

As for the mortgage insurers, Motley Fool analyst James Early told Dow Jones Newswires "we still have had a lot of negative housing news and a lot of negative employment news, which can morph into negative housing news. That's a negative from a business perspective; if the money's not coming in the door for those insurers, and they're paying out more, that's not good."

Consumer Protection on Wide Scale

WASHINGTON -- The Obama administration's proposed consumer-protection agency would have broad oversight for a range of products, beefing up the government's regulation of credit cards, mortgages and gift cards, as well as expanding its authority over financial firms.

Draft legislation unveiled Tuesday by the Treasury Department would for the first time make a single entity, the Consumer Financial Protection Agency, responsible for writing and enforcing rules across a range of financial products used by consumers.

Real Time Economics
What Would Consumer Protection Agency Do? "This agency will have only one mission -- to protect consumers," Treasury Secretary Timothy Geithner said.

Securities products overseen by the Securities and Exchange Commission and most of the insurance industry wouldn't fall under the new agency's oversight, a Treasury official said. But the agency would have subpoena power and would be funded in part by the financial-services industry.

The Treasury and White House plan to work with Democratic leaders in Congress to try to move the legislation quickly.

The measure is expected to draw opposition from the financial-services and business communities, which argue that the new agency would stifle product innovation and prevent firms from offering tailored products to customers.

"Basically, the government is deciding what every bank in every circumstance should offer," said Ed Yingling, president and chief executive of the American Bankers Association.

The proposed new agency is part of the Obama administration's efforts to revamp regulation of the U.S. financial system.

The new agency's reach would allow it to streamline federal mortgage-disclosure rules, and enforce recently enacted credit-card rules, Mr. Barr said. It could also potentially write rules to require banks to get permission from customers before enrolling them in costly overdraft plans.

The Tax Implications of Foreclosures

Foreclosure Tax Basics
A foreclosure transaction occurs when a mortgage lender repossesses a borrower’s property and then sells it to pay off the debt. In most cases, however, a foreclosure will only happen when the mortgage debt exceeds the property's fair market value, or FMV. In this situation, the federal income tax rules treat the foreclosure as a sale for the FMV amount.

Therefore, a tax gain will result if the property’s FMV exceeds its tax basis. (The tax basis of a principal residence usually equals the original cost of the property, plus the cost of any improvements.) On the other hand, a tax loss will result if the property’s FMV is less than the tax basis.

If a mortgage lender also forgives some or all of the debt against your property in conjunction with or after the foreclosure transaction, you have cancellation of debt (COD) income. That income is taxable unless an exception applies.

Remember: Just because your property is foreclosed doesn’t necessarily mean the lender will forgive any of the unpaid mortgage balance (the so-called deficiency). When there is no forgiveness, there is no COD income. That said, mortgage lenders in these tough economic times sometimes will forgive all or part of the deficiency, so COD income can be fairly common these days.

Don't Forget the Home Sale Gain Exclusion Break
Another thing to consider is whether or not you qualify for the federal home sale gain exclusion break, which allows an unmarried person to exclude (pay no tax on) a gain of up to $250,000 while married joint filers can exclude up to a $500,000 gain. To qualify, you generally must have: (1) owned the home for at least two years during the five-year period ending on the foreclosure date and (2) used the home as your principal residence for at least two years during the five-year period ending on that date.

The Bottom Line
Probably the most important thing to understand about a principal residence foreclosure is that the mortgage lender will not necessarily forgive any of the unpaid balance that remains after the property is sold. However, in the current environment, some forgiveness would not be unusual. Also, keep in mind that you may not know for quite a while after the foreclosure whether anything will be forgiven.

Tax-wise, the most important thing to understand is that a foreclosure can potentially result in a taxable gain, and it might result in some taxable COD income, too.

Fortunately, with a principal residence foreclosure, an otherwise-taxable gain can often be excluded for federal purposes thanks to the home sale gain exclusion break (state income tax results can vary). Also, some or all of the COD income may be tax-free thanks to favorable tax-law exceptions. However when no exception applies, the COD income is fully taxable.