Feb 23, 2010
Executives
Emily Riley - IR S.A. Ibrahim - CEO Bob Quint - EVP & CFO Teresa Bryce - President, Radian Guaranty Dave Beidler - President, Radian Asset Assurance Scott Theobald - EVP & CRO, Radian Guaranty Derek Brummer - CRO
Analysts
Mike Grasher - Piper Jaffray Mike Grondahl - Northland Securities Matthew Howlett - Macquarie Capital Nat Otis - KBW Christopher Neczypor - Goldman Sachs Mark DeVries - Barclays Capital Steve Stelmach - FBR Capital Markets Alec Ofsevit - Credit Suisse Steve Percoco - Lark Research Joe Di Carlo - CreditSights
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Radian's fourth quarter 2009 earnings conference call.
For the conference today our participants are in a listen-only mode. However, there will be an opportunity for your questions and instructions will be given at that time.
(Operator Instructions). And as a reminder, today's call is being recorded.
With that being said I'll turn the conference now to Ms. Emily Riley.
Please go ahead.
Emily Riley
Thank you and welcome to Radian's fourth quarter 2009 conference call. Our press release, which contains Radian's financial results for the quarter was issued earlier today and is now posted to the investor section of our website at www.radian.biz.
During today's call you will hear from S.A. Ibrahim, Radian's Chief Executive Officer and Bob Quint, Chief Financial Officer.
Also on hand for the Q&A portion of the call are Teresa Bryce, President of Radian Guaranty; Dave Beidler, President of Radian Asset Assurance; and Scott Theobald, Executive Vice President and Chief Risk Officer of Radian Guaranty. Before we begin I would like to remind you that comments made during this call will include forward-looking statements.
These statements are based on current expectations, estimates, projections, and assumptions that are subject to risk and uncertainties, which may cause actual results to differ materially. For discussion of these risks please review the cautionary statements regarding forward looking statement included in our earnings releases and the risk factors including in our third quarter 2009 Form 10-Q.
These are also available on our website. Now, I would turn the call over to S.A.
S.A. Ibrahim
Thank you, Emily, and thank you all for joining us. In our first quarter earning call in 2009 I outlined several priorities that were critical to Radian's success.
Today, I am pleased to report on our progress and to review the actions we took to achieve our goals in the face of many challenges. My remarks today will focus on the significant progress made as well as our priorities going forward.
But first I will begin with few highlights of our fourth quarter and year-end performance. After my comments Bob will cover the details of our financial position, then before we open the call to your questions I will summarize our accomplishments in 2009 and our priorities for 2010.
Earlier today, we reported a fourth quarter net loss of $91.9 million or $1.12 per share. The net loss for the full year 2009 was a $147.9 million or a $1.80 per share.
While these results clearly reflect the challenging business in macro economic environment, it is worth noting that our performance was better than we expected and there were signs of improvement in our core mortgage insurance business. For example, for those familiar with the seasonal trends affecting mortgage insurance, the fourth quarter is typically the weakest with a largest increase in delinquency.
In the fourth quarter of 2009, however, we experience a lower rate of new delinquencies which is clearly encouraging. We also encouraged by a delinquency report released by the Mortgage Bankers Association last week where the MBAs chief economist Jay Brinkmann noted that mortgage delinquency rate had dropped from the third quarter to the fourth quarter 2009.
This has only happened three times in the nearly 40 year history of MBA survey. You can see the details of Radian's new defaults and other data on our new default roll forward chart on slide 16 of our webcast presentation.
Now I would like to highlight Radian's progress on our key priority areas for 2009. First, we believe that we have successfully eliminated any potential GAAP in near term liquidity.
At the beginning of 2009, we had a combination of bank lines and public debt maturing in 2011 that totaled $350 million as well as inter-company tax obligations. We now project sufficient liquidity to satisfy all of our obligations in 2011 and project excess liquidity through 2012.
This was the result of a lower than estimated inter-company tax payment in 2010 due to better than expected 2009 results as well as a number of proactive strategies including buying back debt at a discount, transferring the equity interest in our Sherman Financial subsidiary to Radian Guaranty and the CPS tender announced late last year. Next, the risk to capital ratio for Radian Guaranty was 15.4:1 on December 31, 2009, among the lowest in the industry.
This compares to a ratio of 16.1:1 in the third quarter and 16.4:1 a year ago. This improved ratio was favorably impacted by a success in commuting non-core risk exposure and Bob will provide more details on these transactions in his remarks.
Additionally, we made progress in preparing our 50-state licensed mortgage insurance subsidiary, Amerin Guaranty to write new business in the unexpected event that it becomes necessary in the future. As a result, we now expect to continue rising high quality mortgage insurance business uninterrupted for the foreseeable future.
Third, our mortgage insurance franchise remains strong and we are in a competitive position to take advantage of any future increase in MI penetration. As I mentioned in previous calls, we took several actions over the past two years to strengthen our franchise and to create a well-balanced mix of customers.
Fourth, we utilized our financial guaranty business as a source of capital and successfully continued to mitigate and commute credit risk in both our financial guaranty and mortgage insurance businesses. Our success in this area is reinforced by demonstrated ability to pay ordinary dividends of approximately $100 million in both 2008 and 2009 from Radian Asset and by the New York insurance department granting approval for Radian Asset to release a $143 million in contingency reserve.
As a result of our actions we were able to reduce our risk in force significantly and ultimately improve our MI risk to capital ratio throughout 2009. We expect Radian Asset to pay another ordinary dividend to Radian Guaranty in June 2010 of approximately $70 million.
And finally, we have been successful at Radian in retaining and attracting talented employees throughout this stressful economic downturn. We continue to strengthen our team and I am pleased to announce that Bob Griffith has joined us as Executive Vice President and Chief Operating Officer for Radian Guaranty.
This position reports directly to Teresa Bryce, the President of Radian Guaranty.
Turning to a few additional details on our mortgage insurance business, our mortgage insurance loss provision grew again in the quarter, due to rising delinquencies and the ageing of existing loans in our default inventory. However, reduced volatility in the market and the slowing of new delinquencies in the fourth quarter, lead us to anticipate the stabilization of delinquencies throughout 2010 and a decreased comp by year end.
Importantly, you can see on slide 14 and also on the new slide 15 that loans originated in the second half of 2008 and in 2009, continued to experience a lower number of early defaults. As I mentioned earlier, we have been successful in executing our strategy of reducing non core risk.
In the quarter, we completed a series of transactions that reduced our risk in force in full and modified full insurance as well as NIMs, second-lien, international mortgage risk and financial guaranty CDS. Bob, again will provide more details on these transactions and their impact.
Also, we continue to benefit from our proactive loss management efforts and you will find our fourth quarter rescission rates for MI on slide 9 of our webcast presentation. Attention to the government’s homeowner affordability and stability programs HAMP and HARP have shifted in recent months from the initial statistics on trial modifications to a new focus on permanent modifications.
While, it continues to be difficult to gather complete data on these programs from various customers and servicers, we believe that approximately 1.2 billion of previously written insurance is included in the HARP program. Additionally, more than 27,000 delinquent loans, carrying Radian Insurance have been placed in a HAMP trial period to date.
While only about a 1,750 of those modifications have been completed, we are encouraged by the recent statistics from the treasury department on the success of the program and the increase in HAMP modifications, transitioning to permanent status. And the administration in a continued focus on the housing recovery effort recently announced a new plan to designate $1.5 billion from the Emergency Economics Stabilization Act in the states hardest hit by home price declines and unemployment.
Our new $2.4 billion in new mortgage insurance written in the quarter was clearly impacted by reduced mortgage origination volume and lower mortgage insurance penetration. However, once again this new business constitute of launch with excellent risk characteristics, with 99.9% prime credit quality and 76% with FICO scores of 740 or above.
We are focused on writing as much of this high quality mortgage insurance business as possible, and are concentrating our efforts on attracting new customers and reinforcing the value of our product. Finally, it is important to recognize three additional examples of Radian's strength in our results.
First, Radian's book value at December 31, 2009 was $24.22 per share. Second, we believe that our existing book of business as of year-end 2009 contains embedded value of $1.3 billion on our first lien domestic portfolio as shown on slide 12.
And third, our investment portfolio remains strong at $6.2 billion. Now I'd like to turn the call over to Bob for details of our financial position.
Then I'll follow with a few comments before opening the call to your questions. Bob?
Turning to a few additional details on our mortgage insurance business, our mortgage insurance loss provision grew again in the quarter, due to rising delinquencies and the ageing of existing loans in our default inventory. However, reduced volatility in the market and the slowing of new delinquencies in the fourth quarter, lead us to anticipate the stabilization of delinquencies throughout 2010 and a decreased comp by year end.
Importantly, you can see on slide 14 and also on the new slide 15 that loans originated in the second half of 2008 and in 2009, continued to experience a lower number of early defaults. As I mentioned earlier, we have been successful in executing our strategy of reducing non core risk.
In the quarter, we completed a series of transactions that reduced our risk in force in full and modified full insurance as well as NIMs, second-lien, international mortgage risk and financial guaranty CDS. Bob, again will provide more details on these transactions and their impact.
Also, we continue to benefit from our proactive loss management efforts and you will find our fourth quarter rescission rates for MI on slide 9 of our webcast presentation. Attention to the government’s homeowner affordability and stability programs HAMP and HARP have shifted in recent months from the initial statistics on trial modifications to a new focus on permanent modifications.
While, it continues to be difficult to gather complete data on these programs from various customers and servicers, we believe that approximately 1.2 billion of previously written insurance is included in the HARP program. Additionally, more than 27,000 delinquent loans, carrying Radian Insurance have been placed in a HAMP trial period to date.
While only about a 1,750 of those modifications have been completed, we are encouraged by the recent statistics from the treasury department on the success of the program and the increase in HAMP modifications, transitioning to permanent status. And the administration in a continued focus on the housing recovery effort recently announced a new plan to designate $1.5 billion from the Emergency Economics Stabilization Act in the states hardest hit by home price declines and unemployment.
Our new $2.4 billion in new mortgage insurance written in the quarter was clearly impacted by reduced mortgage origination volume and lower mortgage insurance penetration. However, once again this new business constitute of launch with excellent risk characteristics, with 99.9% prime credit quality and 76% with FICO scores of 740 or above.
We are focused on writing as much of this high quality mortgage insurance business as possible, and are concentrating our efforts on attracting new customers and reinforcing the value of our product. Finally, it is important to recognize three additional examples of Radian's strength in our results.
First, Radian's book value at December 31, 2009 was $24.22 per share. Second, we believe that our existing book of business as of year-end 2009 contains embedded value of $1.3 billion on our first lien domestic portfolio as shown on slide 12.
And third, our investment portfolio remains strong at $6.2 billion. Now I'd like to turn the call over to Bob for details of our financial position.
Then I'll follow with a few comments before opening the call to your questions. Bob?
Bob Quint
Thank you S.A. I'll be updating you on our P&L activity and trends for the fourth quarter of 2009 and our year-end financial position.
Our MI provision for losses of $459.9 million this quarter reflects a continued ageing of delinquencies increased severity and higher delinquency count albeit at a slower pace than previous quarters and at significantly lower level than we had anticipated. The fourth quarter is typically the worst quarter seasonally and although incurred losses were higher in the fourth quarter than the previous quarters of 2009, we had expected much higher level.
In contrast, the first quarter is usually the best quarter seasonally. There is a slight reduction in our rescissionary denial rate estimates this quarter, as compared to the first three quarters of 2009 when these estimates were.
The dollar amount of denial in rescissions for the fourth quarter of 2009 rose to approximately $315 million compared to $309 million in the third quarter and was approximately $1.3 billion for the year 2009. These figures included significant amount for loans and deals with remaining deductibles for which a claim would not have actually been paid.
So in effect our rescission and denials preserved the subordination in front of our position. The claims paid for the quarter consisted of $239 million of first liens and $15 million of second lien.
We also made $198 million termination payment for a large group of modified pool and pooled structured transaction and we received $25 million of recoveries from trust accounts of terminated cap of reinsurance agreements. We expect the total claims paid will be approximately $1.5 billion for 2010, as a result of an anticipated increase in foreclosures working their way through the system.
We completed a series of MI transactions during the quarter that are consistent with our strategy of reducing non core exposure on favorable each term. They are as follows: We terminated 237 million of modified pool risk in force which was included in our primary statistics and $30 million of pool risk in force.
This produced a GAAP and stat capital benefit and reduced our primary delinquency count by 12,575 and our poor delinquency count by 2311 which you can see on disclosure Exhibit S to our press release. Without this transaction our total delinquency count during the quarter would have been up by 7.6% which is significantly less then we were anticipating.
We also bought approximately $64 million of NIM bonds for a purchase price of $49 million which produced a smaller statutory capital benefit and had minimal GAAP impact as the purchase price approximated fair value. We have continued to buy NIM bond at a discount in January.
Also in January we settled with our counter party on approximately $21 million of fully reserved second lien risk in force for a settlement price that produced a small GAAP and stat benefit. And finally for a small price we terminated our large international CDS which eliminated over $3 billion of exposure.
Second lien risk in force has been reduced to $263 million as of December 31, 2009 and was further reduced in January. The loss reserve and premium deficiency reserve for second lien at 12/31/09 is approximately $69 million or 26% of the risk.
And we believe any uncertainty around the performance of second lien, NIMS and CDS what we collectively include in our other MI risk in force has been substantially reduced. This other mortgage insurance risk in force has gone down significantly from 5.1 billion as of December 31, 2008 to 1 billion as of December 31, 2009.
In financial guaranty, we experience the general moderation of credit trend this quarter although the trends were clearly negative for the year. With regard to the one problem CDO's ABS transaction we still believe that based on current expected cash flows which are very volatile we will not be required to pay principal until 2036 or later and that the ultimate principal payment will likely be a significant portion of our total par exposure of approximately $466 million.
However, we expect to begin paying clients for interest advances sometime this year. At such time we would be required to post a statutory loss reserve for the present value of future losses which would be probably weighted based on the series of potential outcome and would negatively impact Radian assets and thus Radian Guaranty statutory capital.
The asset class that had deteriorated most in 2009 is our top CDO which contain underlying collateral that consists mostly of trust preferred security issued by regional and community banks. In October our worst performing TruPs transaction with a total par exposure of approximately $212 million defaulted due primarily to an abnormally high amount of interest deferrals by banks or the GAAP impact had been booked through the fair value line throughout 2009.
The pretax statutory loss expense for this exposure was $63 million which was booked in the fourth quarter and compares to the $50 million to $90 million that we had estimated last quarter. We were pleased that in early January we were able to eliminate the exposure a $96.5 million of the $212 million.
We still believe that the eventual outcome of the significant amount of interest deferrals of the TruPs collateral will have a big influence on the ultimate performance of our TruPs portfolio. Updated details of our TruPs exposure is presented on webcast slide number 27 including a new column that depicts current interest coverage on each deal.
Importantly, we have repeatedly demonstrated that our financial guaranty business is proactive in dealing with the problem credit often removing a large uncertainty at a discount to our maximum exposure. We will continue to focus on such effective loss mitigation.
As we mentioned in the third quarter due to the overall reduction of exposure in our financial guaranty portfolio, we transferred approximately $143 million from contingency reserves into surplus benefiting both Radian Asset and Radian Guaranty statutory capital in the fourth quarter. The terminations which reduced risk and increased statutory capital to financial guaranty contingency reserve transfer, the net risk reduction due to portfolio run-off and significant statutory investment gains generated during this quarter more than offset the impact of the operating losses and contributed to Radian Guaranty's risk to capital ratio at year end of 15.4:1 among the lowest in the industry.
This ratio gives us substantial capital cushion before 25:1 would be breached and makes it more likely that Radian Guaranty will not breach 25:1. Despite this improvement, we are continuing to prepare Amerin to rate business if necessary and believe this is a prudent backup plan given the continued macro economic uncertainty.
The change in fair value line was impacted this quarter by a tightening of credit spread and the underlying corporate CDO collateral and by a small widening of Radian's credit spread which were the primary drivers of our unrealized fair value gain for the quarter of $142 million. The fair value line could continue to fluctuate, for example, a significant tightening of Radian's credit spread without a corresponding tightening within the underlying CDO collateral could create a substantial GAAP fair value loss that could be unrelated to any actual credit performance.
Our investment portfolio had a return of close to breakeven this quarter and finish a successful year with the total return of just under 12%. We expect to continue to use our cash to commute or reduce exposure on favorable economic turn and this coupled with an expected increase in MI claims should reduce future quarters investment income.
Expenses came in lower than previous quarters primarily due to reduction of variable stock based compensation. We received a $1.5 million dividend from Sherman in January this in all future dividends receive from Sherman now go directly to Radian Guaranty.
At year end we had approximately $356 million of liquidity at or immediately available to Radian Group our best estimates of net tax payments that we will be required to make our subsidiary by October 2010 is approximately $82 million this is substantially below our prior quarter projection due primarily to better than expected fourth quarter results driven by a lower than expect MI loss provision and a substantial realized investment gain that reduced our taxable loss, because this $82 million estimate is based on the preliminary taxable results for the complete 2009 year, we do not believe the number will change very much when our tax return is filed. It is also possible that there to be a tax payment due to Radian Guaranty in October 2011 the maximum of which could be $77 million.
In January, we bought back approximately $32 million of (inaudible) on our June 2011 debt and we paid approximately $29 million leaving $160 million of prior (inaudible). With regard to CPS we have successfully completed the purchase of $83 million of these securities from 2 out of the 3 trusts in January at an aggregate purchase price of $29 million.
We continue to evaluate our options, but one alternative we have is to collect one or both of the two trusts at which time the holders of the CPS securities would receive face value. At that time we would receive up to $83 million.
We continue to negotiate with the other CPS holders and we will update you with further progress on this regard. So, if you summarize our holding company liquidity situation, we had $356 million at year end, plus $ 29 million for bond repurchase and $29 million for CPS purchases, leaving $298 million available today.
Assuming we decide to collapse a CPS trend [ph], we would receive up to $83 million for a total of $381. Our primary expected obligation outside those covered by our subsidiaries on the estimated inter company tax payment by October 2010 of $82 million principal repayment of our debt of $160 million in June 2011, and a maximum inter company tax payment in October 2011 of $77 million.
So as of today, we expect to have enough to settle these obligations through 2011 with over $60 million in excess liquidity. There are no material obligations expected in 2012 and our next $250 million of public debt matures in February 2013.
I'd now like to turn the call back over to S.A.
S.A. Ibrahim
Thank you Bob, before we open the call to your questions, I would like to remind you of our important accomplishments in 2009 once again. We successfully improved our liquidity position and now project except liquidity through 2012.
We improved the risk to capital ratio for Radian Guaranty to 15.421, as a result of this and our preparation of Amerin if needed we now expect to continue writing [ph] high quality mortgage insurance business uninterrupted for the foreseeable future. Our mortgage insurance franchise remains strong and we are in a strong competitive position.
We leveraged our financial Guaranty business as a source of capital. We have successfully retained an attractive talented employee despite the economic downturn.
In 2010, we will continue to focus on many of these same goals to further strengthen our MI franchise by writing new profitable business, to utilize our financial guaranty businesses as a source of capital, to commute non-core credit risk and to position Radian with the people, products and competitive strength to succeed as markets recover. And now operator, we are ready to take questions.
Operator
(Operator Instructions). And we'll go to Mike Grasher with Piper Jaffray.
Please go ahead.
Mike Grasher - Piper Jaffray
Thank you. Good morning, everyone.
Bob, wanted you to talk just for a second here on the reserve build in the quarter, and not just the quarter I guess, but looking ahead to 2010. As we look at the delinquency count, I think it's on the slide 16 in terms of new defaults, 39,000, is there any way to sort of gauge the vintage that those are arriving from?
And as we look ahead to 2010 and thinking about that, if you do have new delinquencies coming in from new vintages or younger vintages versus old, what does that say about expectations for a reserve build in 2010?
Bob Quint
Mike, the new delinquencies are still coming mostly from the '06, '07 in particular and early '08 vintages. They are coming from, the '09 so far has performed very well, and we did say that we think overall by the end of 2010, the delinquency counts will be down.
So absent other influences, and I think certainly delinquency counts are major driver to the reserve, but you're going to also going to depend on the other things that impact reserves like ageing and severity [ph] et cetera. So, obviously that's hard to say, but its encouraging that the new delinquencies is slow in the fourth quarter and our statement about the expectation of 2010 is certainly encouraging as well.
Mike Grasher - Piper Jaffray
Okay. Is it fair to say that the multiplier on '06, '07 vintages is a bigger multiplier than what maybe new stage delinquencies might be?
S.A. Ibrahim
What's your question? Mike, would you mind?
Mike Grasher - Piper Jaffray
Vintages in new delinquency from '06, 07. Would the reserves on those be any different than say a delinquent loan coming in from '08 or even '09 just thinking about how may be you change your underwriting methodologies in those different Vintage years?
Bob Quint
I mean to the extent that a lot of the know 607 or on the non core products you know the (inaudible) and subprime those are certainly of a higher role [ph] rate expectation and therefore the run rates on those would be higher. The prime long term lower run rate expectation so I think again all things being equal that would have a lower reserve but you have to look at the loan size and the ageing.
There are other factors that influence it, but I think that your question is on the products certainly prime would have a lower reserve.
Mike Grasher - Piper Jaffray
Okay. One other topic just to discuss real quickly.
Is there any way to tell us in terms of how much are HAMP and other modification programs impacting your default inventory?
Teresa Bryce
We are starting to see more traction around both the HAMP and HARP programs, but certainly more from HAMP perspective as you probably have seen some of the reports we've seen quite a bit of volume going up from the HAMP inventory, but now you are starting to also as S.A. mentioned focus on moving from just getting loans into HAMP trial mod into permanent status.
So, we are encouraged by those numbers. We are starting to see our numbers go up in that regard and we hope that trend will continue.
Mike Grasher - Piper Jaffray
Okay. And is there any way to note sort of the performance of those permanent mods I guess to date.
Teresa Bryce
Its really too early at this point with respect to the HAMP program in particular but I did see some information out at the OCC and OTS that was in I think one of their December reports that would indicate that when payments are reduced for borrowers the incidents of re-default goes down significant and so since the HAMP program is designed to lower the payment for borrowers if that would indicate that we should see our lower default rate associated with those modifications.
Operator
And next from line of Mike Grondahl with Northland Securities. Please go ahead.
Mike Grondahl - Northland Securities
Yes, just a couple questions. Could you talk a little bit about the termination that was done, Bob?
It looks like you paid about $15,000 per delinquent loan, that's a lot lower than a typical claim paid of $45,000 to $50,000. I'd just like to understand that better.
And then secondly, the tender I guess happened in January. Can you explain the effect on the first quarter that that will have?
Bob Quint
Okay on the termination we've paid a price that was less than the amount of reserve on the books so we booked not a substantial but a profit in the fourth quarter because we paid an amount that was less than the reserve. So we and our counter party agreed on a price that made sense but these were loans that were substantially reserve or deal that were substantially reserved so think about the stock losses being almost fully exhausted and then what was the other question Mike?
Mike Grondahl - Northland Securities
Just on the tender and its effect on the first quarter?
Bob Quint
Yes I mean more from a liquidity stand point so I don't think in terms of P&L impact that the price we paid was reflected already in our P&L so the impact potentially to whatever quarter we act if we decide to collapse the trust would be we look at cash so its more of a liquidity impact than a P&L impact.
Mike Grondahl - Northland Securities
Okay, good. But that is cash coming in the first quarter
Bob Quint
Well it could be in the first quarter if we decide to collapse a trust or whenever we do
Mike Grondahl - Northland Securities
Okay. And then help me, how do I think on the bank TruPs slide where you included that interest coverage column, how should I think about interest coverage?
Just help me, how do I think about that, what does that mean?
Dave Beidler
The interest coverage ratio I think of it as interest corrections on the collateral minus associated transaction expenses expressed as a percentage of some of hedge payments and interest payments do on our tranche, any pari passu tranches and any senior tranches.
Mike Grondahl - Northland Securities
Okay and obviously the higher the number the more cash you have coming in to cover kind of the debt service on that tranche if you were
Dave Beidler
Correct the higher the better
Mike Grondahl - Northland Securities
Okay. And then, Bob, on the cumulative slide where you come up with cumulative losses, you mentioned that that went up third quarter to fourth quarter.
What was the primary driver of that percentage now being a cumulative loss, 13.7% versus 12.5%?
Bob Quint
Mike, we constantly update that based on actual results and the low rates has gone up a little bit based on just actual experience. So, it's mostly the default that claim rates going up a little bit and that's updated as best we can every quarter.
Mike Grondahl - Northland Securities
Okay. Thanks, guys, and congratulations on all the progress you made on liquidity.
And delinquencies will be something to watch, but it's finally getting a little bit of good news there too. Thank you.
Operator
Now we will go to Matthew Howlett with Macquarie Capital. Please go ahead.
Matthew Howlett - Macquarie Capital
Guys, thanks for taking my question. On the paid claim guidance, I know there's a backlog of inventory that needs to be paid eventually and that was the case last year and I think you beat your guidance last year substantially.
In your guidance for this year, what are you baking in in terms of, first, the GSE buyouts you're going to be taking, obviously there are delinquencies on the balance sheet and one would presume they're going to delay the amount of foreclosures going forward. And then two, Obama yesterday just made it harder for banks undertaking HAMP to basically foreclose.
They said that you have to wait 30 days after they fail to see what they can do. And they also made it tougher for banks to threaten HAMP foreclosures on borrowers in HAMP trials.
What are you baking, how are you baking those two components into your guidance?
Bob Quint
We are not really expecting those things to impact the claims so if they do it's certainly conceivable that the claim volume is continuing to be less than we expect and it's going to slow things down. So that is certainly possible, we are though expecting the amount of claims receive to increase and some of the moratoriums to be lifted and things to work themselves through the system so we haven't looked and at it and said those things are going to impact claims and reduce claims.
So if they do we may be below our guidance again but we have no reason to see that at this point.
Matthew Howlett - Macquarie Capital
Okay, and then the same with the GSE buyouts, you're just assuming that they basically just continue the foreclosure process as they normally would, there wouldn't be any delay because they've taken them on balance sheet, if you will?.
Bob Quint
That's right we haven't figured that and because we really didn't have the right estimate.
Matthew Howlett - Macquarie Capital
Got you, okay. And then moving to the Financial Guaranty unit with great performance.
You mentioned your credit spreads tightening could result in a mark-to-market loss on some of the CDS. And your credit spreads presumably will begin to tighten given your liquidity.
Can you give us just a sense on how you view book value, changes in book value going forward if your spreads were to tighten not back to maybe historical areas, but maybe they that we come in 500 basis points over time? And then maybe it's just the underlying corporate CDOs, they'll tighten.
I mean, how do you look at your book value? Any sort of clarity you can give us on that?
Because there's going to be some volatility on the GAAP number as we move forward. Any type of clarity would be great in how you view book value going forward.
Bob Quint
Yeah I mean is a great question and so far as years have gone and the spread movement has been fairly in sync so with corporate spreads come in and our spreads comes in a similar way they will offset each other in terms of fair value like they have this year for example although with the quarters may be a little bit volatile, but we did want to point out and you said it that if our spreads come in much more than the underlined collateral we may have a significant GAAP loss that you know in the end absent credit events wouldn't really be meaningful. All the while the structure transactions which are derivative are going to expire over time which is going to offset any impact positive or negative.
So, you are right it could be volatile and we did want to point out the possibility of our spread tightening significantly and if that were to happen sort of in a vacuum with no other credit events, we would view it as meaningless and it would reverse over time. But it could impact book value from quarter-to-quarter potentially in a big way.
There is nothing covenant wise and business wise that we think would be triggered from that, but certainly we just want to make sure that people understand it and are aware of it.
Matthew Howlett - Macquarie Capital
Great. Thanks for the clarification.
So your $24 plus book value today, that's a real number and any volatility will just financially be reversed out ultimately if you don't pay any claims on the corporate seat that is what has very high attachment points anyway?
Bob Quint
But this is relatively real certainly there are some transactions that might be a little bit different but relatively.
Operator
Our next question is from Nat Otis with KBW, please go ahead.
Nat Otis - KBW
Couple of quick questions. First one, just to clean up on a numbers one for HAMP.
You said that to date 27,000 have gone into HAMP with 1,750 have actually completed the modification process?
Teresa Bryce
Yeah, those were the numbers actually as of the end of the year. So, the numbers are slightly up as of the end of the January, but yes.
Nat Otis - KBW
Okay, any thoughts on how many are out of it without having been modified or cured that are now not in not there about 27,000, but aren't necessarily haven't been modified?
Teresa Bryce
Do you mean loans that were put in a trial status that may have been cancelled or fallen out?
Nat Otis - KBW
Yeah, correct.
Teresa Bryce
I believe the number’s relatively small, but it's probably about a little under 1,500 loans.
Nat Otis - KBW
That's helpful, I wouldn't have expected it to be high, just was curious to kind of get that. Second, on page 16 the slide where you talked about the rescission and denial activity, anything to read into?
Fourth quarter numbers, you seem to do pretty well on the rescissions and denials in the fourth quarter more or so than prior quarters in '09 any, thoughts on why there was just more done in the quarter or is that just a matter of cleaning up by year end?
Bob Quint
No I mean I think that trajectory on actual denials and rescissions have been going up although the estimate came down slightly in this quarter, the actual number has gone up and that's basically what we expected.
Nat Otis - KBW
Fair enough. And then just last, any comments on competition out there, you have new market entrants that got GSE approval and this morning you just had some commentary from another competitor talking about lowering pricing for higher FICO business that might compete against FHA, any comments on competition in the market right now?
S.A. Ibrahim
Yeah. And we'll answer it in two parts.
First new entrants and then second the gaining ground in the FHA. In terms of new entrants, we look at that as a positive in terms of the fact that there's capital out there which finds our industry an attractive place to invest in.
Having said that, we certainly appreciate the fact that new entrants delayed getting into the market until we and our peers got into a stronger position, rather than a year ago when we were most vulnerable. And with that, I'll ask to Teresa to address the FHA comment.
Teresa Bryce
I mean we've been very focused on what we need to do to move MI penetration and move volume back to MI execution versus FHA and we've been working with lenders over the last few months to identify program, product and pricing opportunities that will move share back to MI. In particular, we've been working on the use of our existing Split Edge program that is competitively priced with FHA especially for high FICO borrowers.
So, we're going to continue to explore and evaluate viable opportunities to move, share that's a big focus of ours for 2010.
Nat Otis - KBW
And just one last quick question on looking at on 2010 when you are kind of projecting what the market’s going to do, what are you thinking from a home price appreciation standpoint, how does that factor into your projections out in 2010?
Scott Theobald
We actually expect house prices, they have been flat to slightly up and we expect that trend to continue.
Operator
Our next question is from Christopher Neczypor with Goldman Sachs. Please go ahead.
Christopher Neczypor - Goldman Sachs
Thanks for taking the call. Just a question on your financial guaranty book, given what we are seeing in the muni market may be Harrisburg is the headline example, I was hoping you could talk a little bit about what you are seeing in your underlying exposures within the public finance book and how you are thinking about any potential problem credits within that piece of the portfolio.
Thanks very much.
Dave Beidler
This is Dave Beidler again. We've you know I have seen stress across many sectors of our public finance portfolio and not surprising given the current environment.
We believe that the sectors that most concern us surround our health care and long term care books of business at this point. And we also have our Chief Risk Officer Derek Brummer, is there anything you want to add to that?
Derek Brummer
Well, I mean the trend we've seen with respect to government related issuers they've generally been holding up in the stress. unlike Dave said it’s really the health care and long term care where we've seen the most stress and we've seen a certain amount of stability on the health care side and certain issuers reversing investment losses that they seen in 2008 and 2009 are starting to reverse themselves.
Christopher Neczypor - Goldman Sachs
So for things like long term care I mean what is sort of the expectation for 2010 and 2011 and how that might manifest itself in terms of potential losses?
Dave Beidler
Well, we monitor our credit very closely, some of them are receiving more scrutiny than others obviously, but we are not making any projections about losses in either of those sectors at this point.
Operator
And next from the line of Mark DeVries with Barclays Capital. Please go ahead.
Mark DeVries - Barclays Capital
I was hoping to get a little additional color about the guidance around delinquencies, expecting them to stabilize and then head down by the end of the year. Does that at all depend on loans curing through HAMP and a decline in unemployment?
Or does your analysis suggest that given where your book is and its aging that you're kind of already nearing a peaking of losses?
Scott Theobald
The answer is kind of yes and yes. We noted that there has been a slowdown in new defaults we've also seen stability in cures.
We're seeing in early-stage delinquencies actually an increasing rate of cures which is a good sign. Obviously we've talked about modifications and we think those will be important to the delinquency inventory being reduced and lastly we look for signs of credit burnout and the earlier books, earlier vintages especially 2006 and prior, the composition of new defaults suggest that there’s credit burn out occurring and most of new defaults now are from repeat defaults as opposed to first time defaults.
Mark DeVries - Barclays Capital
And can you give us any sense of the kind of pace you expect in the decline in delinquencies over the next year or two?
Scott Theobald
I'm sorry I didn't quite hear that.
Mark DeVries - Barclays Capital
Is there any color you can give us on the pace of delinquency, of the decline in delinquencies you'd expect over the next year or two?
Scott Theobald
I've actually expected it to be kind of flat to slightly down throughout the year.
Mark DeVries - Barclays Capital
Any developments recently around protests from servicers around rescissions? Any concern that you could be dealing with a lawsuit similar to what Magic faces?
Teresa Bryce
One of the things that we have been hearing from servicers and from some third parties who work with servicers is that servicers feel as if our process which of course hasn't changed over time is the most transparent process that's out there and we are continuing to try to make sure servicers understand the reason for any rescission or denial. With that being said we have seen rebuttal rate go up a little bit, it's probably around 20%, but a number of those rebuttals are sort of form rebuttals as well that don't really bring any new information to the table.
So we have continued to have a process of making sure that servicers understand the reason for the rescission that they get information about that, that they have an opportunity to rebut that decision and we do review that. And if there is new information that they provide we have reversed those decisions with appropriate information but without that we see most of the rescission stand.
Operator
And we will go to Steve Stelmach with FBR Capital Markets.
Steve Stelmach - FBR Capital Markets
Just a quick follow-up on the delinquency guidance. You're expecting delinquencies to be flat or down by year end, that's a total count number.
But can you give us a little bit more detail on the new delinquencies coming into the inventory? Maybe some historical context, you mentioned credit burnout.
When books of business hit credit burnout, what's the pace of new delinquencies? Does it sort of plateau at those elevated levels or does it tend to come down pretty aggressively once you hit that burnout?
Scott Theobald
I am not sure you can characterize that as being always the same and I think this economic situation is probably a little bit different from past, but usually what you'll see is you'll see the trend kind of rising, then it will kind of a bottoming period and that's what we refer to a kind of a bottoming period and then of course you will see it start to gradually improve.
Steve Stelmach - FBR Capital Markets
I was going to say, so when you think about new delinquency count, does that tend to plateau once things peak and stay there for a while or does it tend to reverse?
Scott Theobald
I expect the plateauing before a reversal.
Steve Stelmach - FBR Capital Markets
Then is that usually a drawn-out process? I know it is tough to categorize this credit cycle like any other, but what's your expectation?
Scott Theobald
I don't expect it to snap back sharply. I expect there is kind of bottoming process that has been going on for a bit of a time now, and I expect that to continue.
In fact in the fourth quarter we made a comment about the seasonality of the fourth quarter. That was the first evidence that we actually saw kind of a cynical bucking of the seasonal trend.
But it's awfully early to declare kind of a win and declaring that [ph] everything is clear from here.
Operator
We will go to Alec Ofsevit with Credit Suisse.
Alec Ofsevit - Credit Suisse
I have two quick questions. My first one is can you just tell us what your default to claim ratio is on the first lien book before denials and rescissions?
Bob Quint
We don't disclose that. We give you the net number.
Alec Ofsevit - Credit Suisse
Then my second question is a broader question. It is just what do you see as the future of the size of the private mortgage insurance market compared to the FHA market share, which today looks like it is close to 85%?
I guess how do you see that trending over time?
S.A. Ibrahim
I will ask Teresa to comment specifically in terms of some of the things she has been involved with and in customer discussions. But my sense from both reading what's happening at the FHA and their intent as well as from reading what the industry players on the mortgage side are feeling, I think there is a view that is shared by many others including the FHA that this market should have a room for both government and private players, and that is supported by the fact that we, the private mortgage insurance industry stood behind a significant amount of losses that otherwise would have been borne by the tax payers.
Also from a lender perspective having been one myself and having at Radian a team of people running our mortgage insurance business who come more from a lender background than in mortgage insurance background and therefore are closer to our customers, the sense I get is lenders get concerned about putting too many eggs in one basket and there is the degree of concern. I sense on their part that they have too many eggs right now in the FHA basket.
Having said that, we have to do a lot of work in making our products more attractive and other things that Teresa has been engaged in.
Teresa Bryce
Yes, I would agree with S.A.' s comment that one of the things that we are hearing from our customers is that they would like to see movement back to a larger percent MILLION, sort of conventional execution.
So as I mentioned, we are continuing to work with them to identify what program matters or pricing changes need to be made in order to make that happen. Obviously we want to that in a way that still allows us to have the appropriate credit and pricing for our book of business But clearly there seems to be a lot of focus there, both on our part and as well as the lender customers.
I was also encourage by comment from the FHA and the Department of Housing that talk about the fact that they would also like to see some movement back to the private sector, but they think that FHA shouldn't be this large of a size of the market and so I view that as a positive as well for movement back.
Operator
And our next question is from Mike Grondahl with Northland Securities.
Mike Grondahl - Northland Securities
Yes, just a quick follow-up. I might have missed it, but S.A., did you speak to what you thought your market share was in the fourth quarter?
Sometimes you've given out that general level.
S.A. Ibrahim
I did not, but our market share for the year came in at above 20%, but reason is that we feel good about the fact that we have gained share in this environment, but our priorities we want to be very careful, are focused on writing quality business first and market share is derived from them that rather than shooting for a particular market share objective. That being said we are very happy with the fact that we have gained share and it is a sign of our improved franchise and we continue to focus on actions like continuing to go after new customers and focus on writing new business which hopefully should be positive, but our first emphasis having come out of the cycle is the quality of business and if put in a position we would be willing to trade off market share for quality.
Operator
Next we will go to the line of Steve Percoco with Lark Research.
Steve Percoco - Lark Research
You have indicated that you have excess liquidity through 2012 and that the risk to capital ratio looks good, but what are you thinking about both the need and the opportunity to raise capital over the next few years?
S.A. Ibrahim
We have consistently said that we remain open to new capital, but we want to do it at a time and in a way that makes sense to us if it does make sense to us at all. So, we again continue with the same position where we say that we remain open to it, based on the numbers you saw from the risk to capital perspective and a liquidity perspective.
We have come a long way in terms of need for capital for liquidity and short-term liquidity needs in particular. But if there are opportunities in the market to do more business and having more capital in the face of uncertainty being positive we would be open to it if it makes sense.
Steve Percoco - Lark Research
But you don't have any specific targets or thoughts that say a couple of years down the line you may need to or want to raise capital?
S.A. Ibrahim
We do not comment on any specific targets or plans we have and particularly in the world that is changing so rapidly, our plans would get dated very quickly.
Operator
And we'll go to Joe Di Carlo with CreditSights.
Joe Di Carlo - CreditSights
Would you guys be able to comment on the impacts that you took from the terminations as well as the contingency reserve move if you haven't done that on risk in force to capital?
Bob Quint
On the contingency reserve transfer added $143 million to surplus, so that's the transfer that occurred in Financial Guaranty. In terms of the terminations and some of the other things, all of them were positive to stat capital.
None of them were nearly as material as the contingency reserve transfer even collectively, but they all positively contributed to the risk to capital situation.
Joe Di Carlo - CreditSights
Is there any range you could give on what the risk in force to capital ratio would have been excluding those moves?
Bob Quint
No, we don't really do that. I mean all of these were components of the calculation which are included, so to give numbers without them probably isn't really relevant.
Joe Di Carlo - CreditSights
And looking at claims severity, is there a way that I could find that? I know it was in your K; is it going to be in your K going forward?
Bob Quint
Yes, it's in our disclosure. It's actually on page Exhibit L of our disclosure where we have average claim paid, and average claim paid has gone up a little bit this year.
Joe Di Carlo - CreditSights
Is the primary difference between, severity is pretty low; at year end it was about 28%, 2008, compared to maybe PMI which is closer to 100%. Is that all due to the effect that you're taking, claims paid by the original loan amount instead of risk in force?
Bob Quint
That could account for that kind of difference. 28% sounds right because our average coverage percentage is about 25%, so that seems right as a percentage of the loan amount.
Joe Di Carlo - CreditSights
Okay, so in terms of risk in force it's probably close to around a 100%.
Bob Quint
Yes, absolutely or above.
Joe Di Carlo - CreditSights
Or above. Okay.
Operator
There are no further questions. I will turn it back to you Mr.
Ibrahim for closing comments.
S.A. Ibrahim
Thank you operator and thank you all for participating on our call. Thanks.
Operator
And ladies and gentlemen, that does conclude your conference. You may now disconnect.