The widening sub-prime meltdown spread more pain Monday as the financial markets absorbed reports from a number of companies of problems stemming from mortgages issued to people with poor credit:
• Mortgage insurers MGIC Investment Corp. and Radian Group Inc. said they might write off their combined $1.03-billion stake in a venture that invests in sub-prime mortgages on which payments were past due.
• American Home Mortgage Investment Corp., which lends to people close to the sub-prime category, postponed payment of its dividend, took “major” write-downs and said its lenders were demanding that it put up more cash. Its stock plunged 39%.
• Insurer CNA Financial Corp. wrote down $20 million in sub-prime-backed securities.
• A German bank with U.S. sub-prime exposure cut its profit forecast and replaced its chief executive.
Milwaukee-based MGIC and Philadelphia-based Radian, which have agreed to merge, didn’t give the size of the planned write-downs, saying only the full investments in their venture could be written off.
Shares of MGIC, which is slated to acquire Radian, sank 12% to $40 in after-hours trading after falling $1.05 to $45.44 in regular trading. Radian fell $3.20 to $37, after ending the regular session at $40.20, down $1.32.
The companies’ joint venture buys mortgages with overdue payments, aiming to improve collection rates before selling packages of the debt at a profit.
MGIC said the market for sub-prime mortgage had seen “significant turmoil” since February, with “dislocations accelerating to unprecedented levels” this month. The company had planned to sell part of the venture to fund a share buyback after it acquired Radian.
MGIC Chief Executive Curt Culver said July 19 that he was encouraged by the list of potential bidders for the venture.
Through the close of regular trading Monday, MGIC stock has fallen 27% this year, while Radian is down 25%.
American Home Mortgage, based in Melville, N.Y., said late Friday that it was struggling from “unprecedented” disruption in credit markets. The announcement fed investor worries that bad loans were extending beyond sub-prime lenders.
The company, which recently held 2.5% of the U.S. mortgage market, specializes in prime and near-prime loans, but they have included many loans that allow borrowers to produce little documentation of income or assets.
Trading in the company’s shares didn’t open during the regular session Monday. In early trading, they tumbled to $6.39 from Friday’s close of $10.47.
“Bankruptcy is not out of the question” for American Home, said Matt Howlett, an analyst at Fox-Pitt Kelton Inc. in New York. “It needs to find a partner with alternative funding and hope the market turns around.”
He added, “It’s clear now we’re in a liquidity crisis. Any loans that aren’t pure prime are falling in value.”
Chicago-based CNA’s write-down contributed to $91 million in second-quarter investment losses and a 9.2% decline in profit to $217 million, or 80 cents a share. CNA shares closed down $1.71, or 4%, to $41.62 after dipping as low as $37.80.
CNA said it held $834 million of securities linked to sub-prime mortgages at the end of June, less than 2% of its portfolio.
In Germany, shares of IKB Deutsche Industriebank, which 10 days earlier said the sub-prime crisis wouldn’t affect it, fell 20% in Frankfurt on Monday after it reported problems with investments in sub-prime mortgages.