MGIC Investment Corp., the nation’s largest mortgage insurer in terms of policies-in-force, reached a preliminary deal with Freddie Mac late Wednesday to resolve a coverage dispute that threatened to prevent the firm from backing its loans.
The positive news caused the MI’s share price to spike 14% in trading Thursday.
MGIC will make payments to Freddie over four years under the arrangement, which requires approval from boards of both firms, the company said in a press statement.
The firms must still agree on matters “significant to final resolution,” according to the statement.
According to a report from Bloomberg, MGIC faced a deadline Wednesday to reach an agreement with Freddie over how much coverage the firm must provide on groups of loans it insured for the GSE.
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 an 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.
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 coverage on roughly $166 billion of home mortgages, according to the
