May 5, 2011
Executives
S.A. Ibrahim - Chief Executive Officer and Director C.
Quint - Chief Financial Officer and Executive Vice President Emily Riley - David Beidler - President of Radian Asset Assurance Inc Teresa Bryce - President of Radian Guaranty Inc
Analysts
Douglas Harter - Crédit Suisse AG Nathaniel Otis - Keefe, Bruyette, & Woods, Inc. Steve Stelmach - FBR Capital Markets & Co.
Scott Frost - BofA Merrill Lynch Matthew Howlett - Macquarie Research Michael Grondahl - Northland Securities Inc.
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Radian's First Quarter 2011 Earnings Call.
[Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Emily Riley, Vice President of Financial Communications.
Please go ahead.
Emily Riley
Thank you, and welcome to Radian’s First Quarter 2011 Conference Call. Our press release, which contains Radian’s financial results for the quarter, was issued earlier today and is posted to the Investors 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 Bazemore, President of Radian Guaranty; and Dave Beidler, President of Radian Asset Assurance. 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 risks and uncertainties, which may cause actual results to differ materially. For a discussion of these risks, please review the cautionary statements regarding forward-looking statements included in our earnings release and the risk factors included in our 2010 Form 10-K.
This is also available on our website. Now, I would like to turn the call over to S.A.
S.A. Ibrahim
Thank you, Emily. And thank you all for joining us.
Today, I would like to first review the macroeconomic factors affecting our business and then highlight the few aspects of our financial performance in the quarter. Next I will turn the call over to Bob to cover the details of our financial position.
Before we open the call to your questions, I'll comment on recent legislation important to our business. Many headlines last week focused on Federal Reserve Chairman Bernanke's remarks on the scale of the economy.
While it pointed positively to moderate improvement in the general economy, he also called out the housing market as a drain on growth. He emphasized that the U.S.
economy grew at a sluggish 1.8% annualized rate in the first 3 months of the year while unemployment remained stubbornly high at 8.8%. He called our nation's depressed housing market the primary pinpoint in our economic recovery.
Unfortunately, the stagnant housing market clearly impacted our mortgage insurance results in the first quarter. Despite encouraging trends over the past year, including continued declines in our mortgage insurance delinquencies, our ability to maintain a strong share of today's high quality mortgage insurance business and our progress in regaining share from the FHA, the ongoing foreclosure issues and languishing delinquencies in late stages of default weighed heavily on our mortgage insurance business.
We have provided several new disclosures this quarter to help you better understand this effect on our delinquency portfolio. Bob will provide more detail on these.
But the clearest illustration of our aging delinquency population may be found on webcast Slide 13, where you can see that loans at least 12 months past due now account for 52% of our delinquency portfolio. To provide perspective on this number, our percentage of loans in this late stage of delinquency in more normal times before the downturn was in the 10% to 20% range.
Yet as we have updated this chart for the past several quarters, the percentage of loans in this category has continued to increase. Turning to our first quarter financial results.
Earlier today, we reported net income of $103 million or $0.77 per diluted share. This includes the impact of fair value gains of $319 million.
We saw this quarter how Radian spread widening impacted the fair value line significantly, resulting in the realization of some of the positive book value impact that we have said we expect to occur over time. As of March 31, 2011, our book value per share was $7.31.
Our mortgage insurance provision for losses was $414 million versus $529 million last year. Bob will explain the trends affecting this number in the first quarter.
However, it is important to note that our mortgage insurance loss reserve was flat to the fourth quarter of 2010 at $3.5 billion. This resulted in an increase to our reserve for primary default, which now stands at $25,714 as shown on webcast Slide 14.
Uncertainty clearly remains regarding the final outcome of the delinquent loans in our portfolio, particularly the oldest late-stage buckets. Yet we believe that our loss reserves for default positions Radian well as these late-stage loans are ultimately resolved.
We have been encouraged by the administration's recent efforts to improve servicing practices with a focus on streamlining contact with borrowers and encouraging more successful modifications. In recent weeks, we have seen a slight increase in the number of claims received as servicers begin to resume portfolio proceedings following the robo-signing issues and foreclosure suspensions that began last year.
For 2011, we continue to expect these claims of approximately $1.7 billion. The total number of primary delinquent loans decreased by 7% in the first quarter from the fourth quarter of last year, which represented the fifth consecutive quarterly decline.
And in April, we were encouraged by yet another decline in delinquent loans. This represents the 16th straight month of progress in managing our legacy portfolio.
Our risk-to-capital ratio, which is an important measure of Radian Guaranty's financial strength, was 20.3:1. Importantly, we maintain sufficient liquidity at the holding company to contribute additional capital to our mortgage insurance business if needed.
The $2.6 billion of new mortgage insurance business we wrote in the quarter should be viewed in the context of a record low origination market as well as the seasonal effect of a traditionally weak first quarter. Yet our NIW increased forward to $1.9 billion written a year ago, and we successfully maintained our strong share of today's high-quality mortgage insurance business.
This business again consisted of loans with outstanding risk characteristics, 100% prime credit quality and 81% with FICO scores of 740 or above. We continue to make progress as an industry in recapturing market share from the FHA.
We estimate that the private mortgage insurance industry has doubled its market share penetration from the FHA's peak in fourth quarter 2009. The price increase implemented by the FHA last month could also help our industry regain share, and we're additionally encouraged by the changes in loan office compensation in April that eliminated the financial incentives for choosing an FHA loan over a conventional loan.
Finally, it is important to note that Radian Asset, our Financial Guaranty company, continues to serve as the unique source of capital for mortgage insurance business. Despite a challenging environment again for the Financial Guaranty industry, excluding gains and losses on derivatives and other financial instruments, Radian Asset was breakeven in the first quarter.
Consistent with our strategy of minimizing Radian's Financial Guaranty risk, our net par outstanding was reduced by more than $1 billion in the first quarter, which included the termination of our TruPs CDO with $85 million of exposure. In addition, a little over $2 billion of par exposure consisting of reinsurance and corporate CDOs, was terminated in April, with a slight positive impact to our statutory surplus.
During the first quarter, we booked modest incremental losses on a handful of public finance and structured finance transactions, including approximately $5.6 million in incremental reserves related to Jefferson County. There was a continuation of generally stabilizing credit trends in the first quarter, and we expect Radian Asset to pay another ordinary dividend to Radian Guaranty in June 2011 of $53 million.
This dividend payment has decreased slightly from previous expectations due to a reduction in our expected investment income. Now, I would like to turn the call over to Bob for details of our financial position.
C. Quint
Thank you, S.A. I'll be updating you on the P&L activity and trends for the first quarter of 2011 and our financial position as of March 31, 2011.
Our MI provision for losses remained at an elevated level of $414 million this quarter, despite the continuing improvement in our overall delinquency. To give you a better idea of exactly what comprises our incurred losses, we have added disclosure this quarter on webcast Slide 12, which breaks down our incurred loss into its major components including: one, the loss reserve on new defaults that arose during the quarter; two, the reduction in reserves on loans that have cured or prepaid; three, the net incremental reserve on existing defaults, primarily driven by delinquency aging, which typically requires additional reserve and by claims received, for which we typically increase our gross reserves with a total potential claim payment; and four, the incurred loss relating to the disposition of claims, which includes denials and rescissions.
In an ideal world, if our actual performance matches our assumption, the incurred loss component other than the reserve on new default, would zero out overtime. But in this extremely uncertain environment, these components have been volatile.
For example, the fourth category of incurred losses relating to the disposition of claims has been impacted significantly by denials and rescissions including this quarter by a $70 million increase in our IBNR estimate for future overturn of denials and rescissions. While new defaults have declined, which is very positive cures have generously come from earlier default buckets, while the older delinquent loans have mainly stayed delinquent or rolled to pending claims.
On webcast Slide 13, we have added significant loss reserve disclosure, including the total reserves for each delinquent loan bucket, along with our current expected roll rate by bucket on a gross basis and net of the expected denials and rescissions. We hope this helps you better understand the composition of our loss reserve estimate.
As you can see, our reserve estimate includes an expectation that many of these older delinquent loans will not ultimately be claimed and our borrower outreach efforts have appeared to support that general expectation. However, most of these loans have remained in the late-stage delinquency bucket and have not cured either naturally or by completing a modification.
We are working hard to proactively address these old delinquencies but it is a long and difficult process, often on a loan-by-loan basis. The dollar amounts of loss avoided on submitted claims related to denials and rescissions for the first quarter 2011 was approximately $152 million, compared to $267 million in the fourth quarter of 2010.
These figures are net of the overturns that occurred during the quarter which have increased significantly. Claims paid in the first quarter were $365 million.
Excluding any potential commutation payments or captive termination, we expect claims paid in the second quarter to be approximately $430 million. And for 2011, we still believe that claims paid will be in the $1.7 billion range.
Premiums earned this quarter were positively impacted by a decline in ceded premiums due to the termination of most of our captive arrangements, and a small impact this quarter from a premium refund accrual reduction relating to future rescission. The overall premiums earned are up from the first quarter of 2010 but down from the fourth quarter, when our refund accrual was reduced more significantly.
The change in fair value line was primarily impacted this quarter by a widening of Radian's own credit spread, contributing to a net fair value gain on derivative instruments for the quarter of $244 million and a $75 million fair value gain in the gain on other financial instrument line. The total of our March 31, 2011, balance sheet amount related to our derivative exposures and consolidated transactions is now a net GAAP liability of approximately $639 million.
This is $111.5 million more than our current estimate of the net present value of credit loss payments of $527 million as shown on webcast Slide #8. Our holding company cash resources at the end of 2011 are projected to be approximately $630 million, after giving effect to the amounts we can redeem from our CPS Securities and subtracting all expected payments through 2011, including full repayment of our debt maturing in June 2011.
We may use some of this available liquidity to make a contribution from Radian Group to Radian Guaranty if necessary during 2011 in order to maintain a strong risk-to-capital position. I'd now like to turn the call back over to S.A.
for a regulatory update.
S.A. Ibrahim
Thank you, Bob. Before we open the call to your questions.
I would like to briefly discuss the legislative issues important to Radian. As many of you know, the proposed rule for risk retention for residential mortgages was issued for comments.
The rule includes a definition for a qualified residential mortgage or QRM. The comment period ends on June 10.
And while there's no set date for implementation, the Dodd-Frank bill calls for its adoption one year after the final rules are published. While the proposed definition specifically identifies a 20% down payment as a qualifying criteria, as well as an exemption for FHA, the draft also states that a guarantee provided by GSE while operating under conservatorship is exempt from any risk retention requirements.
The proposed definition has caused quite a bit of concern among a broad group in Washington and around the country. Since research shows that 1/3 of our nation's homebuyers would be either adversely impacted or effectively shut out of the market if required to make the 20% down payment.
Various trade, industry and consumer groups, as well as both Republican and Democratic leaders at the House and Senate, have all supported a lower down payment for deserving borrowers. The regulators are specifically seeking comment on the possibility of expanding the QRM definition to include loans with a lower down payment that are protected by private mortgage insurance.
Teresa and I, along with our industry peers, have spent time on Capitol Hill to demonstrate the value of our products, explaining that the presence of private mortgage insurance, in fact, ensures that the private sector has skin in the game, thereby meeting the intent of the risk retention requirements. As we work towards educating key decision makers regarding the unique role of private mortgage insurance in both expanding homeownership as well as protecting tax payers, we anticipate that our customers will continue to originate conventional loans with private mortgage insurance.
In terms of GSE reform, there have been several Congressional hearings on the proposed options for housing finance. Studies have been issued and some legislation introduced.
During our visits on the Hill, we continue to hear a resounding support for private capital in the overall housing finance reform efforts. Obviously, the FHA has already taken steps to decrease its risks and the ultimate risk to taxpayers by implementing its second price increase in less than a year.
While the QRM and GSE reform efforts have a relatively long road ahead, we are encouraged by the bipartisan support for putting private capital at risk in a way that will protect taxpayers and expand homeownership. Based on this sentiment, we expect private mortgage insurance to continue to have a role in serving the needs of low down payment borrowers as the housing market recovers.
Before we take your questions, let me summarize 4 important points. First, mortgage insurance delinquency trends are positive with 16 straight months of decline.
Second, we believe our existing MI book of business as of March 31 contains an embedded value of $1.5 billion, as shown on Slide 10 in our webcast presentation. Third, for Radian, Radian Asset continues to serve as a unique source of capital for our mortgage insurance business.
The company was breakeven in the quarter and continues to reduce its risks while paying dividends to Radian Guaranty. Fourth, Radian's Mortgage Insurance business remains competitively well positioned given our risk to capital, market share, financial flexibility and reserve strength.
And now, operator, we would like to open the call for questions.
Operator
[Operator Instructions] Our first question comes from Douglas Harter with Credit Suisse.
Douglas Harter - Crédit Suisse AG
I was wondering if you could sort of looking at the aging of the portfolio and looking at sort of expected roll rates, did you have a sense yet as to when it might sort of top out at the 12-plus month percentage?
C. Quint
Doug, I think what we're seeing is -- we're seeing a continued movement toward the 12 months, but we're also seeing a slowdown in the new defaults reported. So I think the percentage of loans in that late stage will likely stay high and perhaps go higher.
However, we do expect the overall number of delinquent loans to decline.
Douglas Harter - Crédit Suisse AG
So if that percentage were to go higher, I mean would that lead to continual need for higher reserve for default in coming quarters? All things being equal.
C. Quint
On those loans, all things being equal, yes, because those have a higher expectation of rolling to claim.
Douglas Harter - Crédit Suisse AG
And I guess, just on that, I mean if you could compare sort of the inflows to new 12-plus months from the 4 to 11, versus what you expect to pay, I mean should -- I mean are we at a point where the dollar or sort of the number of loans should start to decline?
C. Quint
I'm sorry, can you repeat that, Doug?
Douglas Harter - Crédit Suisse AG
Yes. I mean, I guess, if you were to look at the loans that are sort of rolling into the 12-plus months that's continued to age from the 4 to 11 bucket compared to the expected claims that you expect to pay.
Are we at a point where the total number of 12-plus-month loans can decline?
C. Quint
We are seeing some cure activity in the 12-plus months, and that has actually picked up recently a little bit. It's still at a relatively low-level, but we have seen it picked up.
So we do expect more cures to come from the 12-plus months overtime as well as the 4 to 11, as well.
S.A. Ibrahim
And Doug, as you know, because it seems so well publicized, one of the factors that compounds the uncertainty related to the reduction in the age bucket is eventually how the AGs come out and what the settlement is in terms of servicing. And the sequential requirements going forward for services to exhaust potentially all modification possible of these, and then go through layers of checks on the completeness and accuracy of their documentation before they can foreclose.
And while it is possible that, that may result in some loans that otherwise would've gone into foreclosure, not going into foreclosure, we are in an environment of such uncertainty that we cannot predict that.
Operator
We have a question from Mike Grondahl with Northland Capital.
Michael Grondahl - Northland Securities Inc.
Two questions. One, could you just kind of give us your outlook for modifications going forward, whether it's HAMP mods or other mods, kind of what you're seeing there?
And then maybe, if you could just handicap the risks in your Financial Guaranty book compared to a year ago? And then lastly, any plans for that Financial Guaranty shell that you bought at the end of last year?
Teresa Bryce
Mike, this is Teresa. I'll take the question on loan modification.
And we are continuing to see loan modifications come through the proprietary mods, continue to be a much larger percentage of the mods that are coming through. And what we anticipate is that we'll see some increase in modification activity.
But it's difficult to sort of really handicap what exactly that's going to look like. The discussion that S.A.
was just having about what the services are going to be focused on, the consent orders are essentially moving forward, and they appear to be requiring a single point of contact for borrowers. And as you may recall, a lot of the complaints related to loan mods and whether loan mods went through effectively or happened was related to borrowers saying that they kept getting shuttled around to the servicing shops.
So we think with that one point of contact, sort of a renewed focus on trying to see which loans can be modified. We'll certainly be working with the servicers hand in hand to try to make as many of those happen as possible.
We believe that we'll see an increase there. But we don't have any way right now of sort of knowing what that's going to look like.
S.A. Ibrahim
And, Mike, on your FG, Dave Beidler will answer the first part of your question then I will address the shell.
David Beidler
I believe, Mike, the first part of the question was, if I had to handicap the portfolio's performance this year as opposed to a year ago, and I would say that we have seen stabilizing trends in some of our most important credit classes, including our corporate CDO portfolio and our TruPs portfolio. And that would be the most important sort of handicap update I could give you at this point.
Michael Grondahl - Northland Securities Inc.
And Dave, could you maybe just -- what do you mean by stabilizing trends? Just kind of help us understand that.
David Beidler
Well, there have been a basically credit upgrade in the corporate CDO portfolio. We didn't have any credit event in that portfolio this quarter at all.
And in the TruPs portfolio, we have seen stabilization in most of our individual transaction in the underlying collateral.
S.A. Ibrahim
And Mike, in terms of the shell, first of all, we feel very positive that we have the shell, that we did acquire the shell, because it gives us the opportunity to explore different alternatives going forward. We continue to look at various alternatives relating to the shell but most importantly, awaiting the final outcome of S&P's model based from which we can get some clarity on what it will take to get a rating from S&P that will allow us to go forward with some of the alternatives we're exploring.
So far we -- based on the preliminary work we've done, we've had some encouraging conversation with potential investors, and potentially view that there may be opportunities for us based on conversations with many players who make the market and muni bonds. But the S&P clarity is essential before we can continue to explore alternatives.
Operator
We have a question from Matthew Howlett with Macquarie.
Matthew Howlett - Macquarie Research
If I'm going to stay on the long-term default forecast, you took the frequency up. I mean was that entirely related to a lower embedded rescission rate going forward or was it just a combination of that and harsher sort of this role rates with the later stage delinquencies?
C. Quint
It's not roll rates. It's the rescission denial estimate, and it's also just a composition.
So the fact that the inventory is aged more, naturally, we're going to have a higher roll rate attached to that. It's not like we took the respective roll rate up.
Matthew Howlett - Macquarie Research
Okay. So it just more of shifting into that bucket?
S.A. Ibrahim
That's right.
Matthew Howlett - Macquarie Research
And then getting back to the rescissions, I mean, on Slide #12, the $111 million with the claimed dispositions. I mean, could you just walk us through what goes on there?
Is it just the lender pushes back on the rescission that goes into arbitration and you end up losing? Is that what ends up happening?
C. Quint
No. The claim disposition lines got a bunch of stuff in it.
So it's going to have changes in our rescission denial estimates in there. It's going to have this impact from the estimate of future overturns.
So it's really the changes in the balance sheet. The actual realization is going to -- is not going to be there.
It's also going to be the difference between the reserve on the claims we pay versus what the actual reserve was right before we pay it. So it's really the claims that have been either paid and/or related to denials and rescissions.
So the most prominent component of that this quarter was the denials and rescissions. And yes, we do have instances where there is push back and what we call rebuttal, and we'll go through it.
And most often, that won't change the status. But sometimes if new information is provided, it would potentially change the status, where we would either reinstate the loan or pay the client.
Matthew Howlett - Macquarie Research
Okay. I mean is there any clarity that you can give us going forward on that line?
Did it change any of your -- I mean is that just going to be a volatile line going forward or could it would work in some cases for you in some quarters?
David Beidler
Certainly, it could. Now we have attempted to capture the future.
This is something that has almost no history to it. And the changes in the past year have been -- or the couple of years have really been very substantial.
So for 2009 we increased our rescission estimate dramatically, in 2010 we cut it back some. So yes, it's kind of volatile because there is very little history and it is changing quickly.
But we always try to capture the future as best we can. And again, we believe we have captured the estimate for future denials and rescissions.
Hopefully, we have done it accurately but it's certainly subject to the uncertainty.
Douglas Harter - Crédit Suisse AG
Okay. That's it.
And then just one last question. On the risk-to-capital, I think you guys are second best in the industry in terms of risk to statutory capital.
Some of your peers seem perfectly comfortable with going above the 25 to 1 getting the -- they received the waivers in the majority of the states. You guys, I think you said in the call, you're interested in dividing down some cash from the holding company to stay below 25.
Why do you see the urgency is to gain market share? Could the cash be used to do something else if you just don't mind going over 25 and what if you end up -- if that ends up being the case, given your peers that really hasn't impacted them?
S.A. Ibrahim
All of this said, is that we continue to have the flexibility. In the event we deem it necessary to contribute capital to Radian Guaranty.
We haven't concluded whether we will and what ratio we will maintain and what the drivers of that would be. Clearly, the driver of that we focus on most is maintaining a strong competitor position to the extent that a strong competitive position translates into the opportunity to do business in a stronger fashion with our customers.
And we will keep monitoring it and we'll keep retaining the flexibility, and we will act as necessary. And while we haven't concluded, I will proceed with this.
Clearly, the fact that our peers have gone above 25 to 1 gives us more room to play.
Operator
[Operator Instructions] We have a question from Nat Otis with KBW.
Nathaniel Otis - Keefe, Bruyette, & Woods, Inc.
I guess, first, maybe following up on that -- on those rebuttals. Is there any way to give a little more color -- are you talking about more people, say, coming that you've had a denial on and they're coming back with the paperwork or is it rescission-related?
Is there any color that you can give on what type of circumstances might be more prevalent in when the lenders and services are coming back to you?
Teresa Bryce
Sure. This is Teresa, Nat.
Let me just split those in sort of 2 buckets. One is the denials, and often the denials are related to an inability to provide documentation upfront in order to protect the claim and allow us to move forward with reviewing it.
And so in that case, we usually notify the servicer to try to get that documentation in. But sometimes after we've given them a great deal of time to do that, and we actually send them a notice that it's been denied, we may get, after that, the actual documentation and then we have to reinstate that loan.
And then we then go through the process of looking at that claim. And it could subsequently -- but it could be subsequently rescinded.
So that -- just to sort of put that in perspective. Separately, on the rescissions, and those are where we've decided to rescind the coverage based on our review of the loan and the loan file.
And in those cases, that's where we really get what we talked about in terms of rebuttals, where someone essentially refutes our ground for the rescission. And then we have a separate group here that looks at those rebuttals to determine whether or not there's any validity.
Those are sort of all over the board. Some lenders just rebut as a normal course without really providing any new information.
And others have actually brought new information to the table that makes a difference in our decision. But as Bob said, the rate of -- most of those decisions are not overturned.
Nathaniel Otis - Keefe, Bruyette, & Woods, Inc.
Okay. And is there any -- are there any trends that you're seeing in that, kind of, increase in those rebuttals and things like that?
Is there anything you can point out that the servicers are doing different or doing more often now than in the past?
Teresa Bryce
I think that over the last probably 2 to maybe 3 quarters we've seen a higher level of rebuttals coming in as some of the servicers have sort of staffed up in those areas to try to look at those rescissions as they come in. So we have seen sort of a heightened level of activity there, but it hasn't changed the return rate considerably.
Nathaniel Otis - Keefe, Bruyette, & Woods, Inc.
Okay. So it could be very easily staffing driven, certainly more coming in.
But if you're not seeing any changes down the road, there might not necessarily be that much of a difference?
Teresa Bryce
Yes. I mean, obviously, we're looking at these on an individual loan or claim basis.
But yes, at this point, while we have a higher number, we're not seeing or at least seeing any trends that will lead us to believe there's any sort of major changes.
Nathaniel Otis - Keefe, Bruyette, & Woods, Inc.
Okay. Great.
And then just -- I think you talked about premiums, that there were some accrual related to rescission and denial activity. Did you give a number on that for the quarter?
C. Quint
No, I didn't give it. I can give it to you off-line, but I just gave a directional movement.
Nathaniel Otis - Keefe, Bruyette, & Woods, Inc.
Okay. And then lastly, you talked about claims going up a little bit as of late in the couple of weeks.
Is that -- would you say that's a direct result of maybe that servicer settlement and people getting more comfortable with things going forward or anything else there?
Teresa Bryce
Yes, I wouldn't necessarily say it was the servicer’s settlement yet because I think they're still just sort of getting that in place. I do think that with all of the robo-signing and other foreclosure issues, as you saw a lot of the major servicers took a pause to relook at what was in their pipeline, to relook at their processes and procedures, to make sure they had the right procedures going forward.
And we saw some sort of slowdown in what was being sent to foreclosure. And I think we started to see that pick up earlier this year, and we're starting to see some of those come through at this point.
Nathaniel Otis - Keefe, Bruyette, & Woods, Inc.
Okay. Very helpful.
Operator
We have a question from Donna Halverstadt with Goldman Sachs.
Donna Halverstadt
I have 2 questions and they are both follow-ups. The first question, I wanted to follow up on the competitive positioning response you gave to the risk-to-capital question.
And two-part follow-up, one, do you expect that at some point in the near future the GSEs might actually tighten up a bit on the requirements that they have for which MIs there kind of wrap the loans that go into them? And secondly, do you get the sense that when the lenders are allocating loans across the MIs, that they are starting to differentiate a bit more based on factors like risk to cap?
S.A. Ibrahim
Regarding the GSEs, I really don't have much color. Teresa do you...
Teresa Bryce
Yes. I would say that the GSEs have been talking about reviving the MI eligibility requirements for quite some time now.
And so it's hard to say whether they'll move forward with that or how they will look and whether they'll have any impact in terms of the group of MIs that are currently approved. So I think we really don't know enough about that at this point.
S.A. Ibrahim
In terms of the second aspect, we do believe that some of the major lenders who, during the last couple of years when there was an increased uncertainty surrounding the MIs, had decided to manage their risk of doing business with MIs by diversifying their business among a number of mortgage insurance players. Some of them may be looking for operational reasons to narrow the number of mortgage insurance companies with whom they do business.
Indeed, some of them are in the process and have solicited bids to limit the number of MI companies they do business with. And while there is no -- whether there's a direct relationship between risk to capital they certainly -- since they have the flexibility, they wanted to be strongly positioned.
Donna Halverstadt
Okay. And the other follow up I had relates to the discussion related to an increase in overturns and building that into your reserves.
Based on what Teresa said, it sounds like at this point, that process is more related to rebuttals, i.e. discussions.
Or has that activity actually resulted in more of that discussion going to arbitration or more of that discussion actually going to lawsuits?
Teresa Bryce
Well, yes. I mean that's been sort of just an internal process that we've had with those lenders.
We haven't had any arbitrations at this point or any sort of material litigation. So it's been our own internal process, which we put in place quite some time ago.
Operator
We have a question from Scott Frost with Bank of America Merrill Lynch.
Scott Frost - BofA Merrill Lynch
I wanted to go over some of your arguments for regulators with respect to the relevance of private mortgage insurance. It seems that what they're saying is that they're more interested in preventing defaults in the first place in homeownership.
And correct me if I'm wrong, but the idea behind TMI is that you increase homeownership and the additional credit costs that may occur are more than offset by the further goal of homeownership. Are your arguments along the lines of disputing their seeming contention that you don't mitigate defaults?
Or is it that you'll -- if you keep the current rule for QRMs you're going to sort of slow the housing recovery and the housing market down?
Teresa Bryce
I think it's really both. I think that we believe as an industry that will have provided data that show that if you compare loans that were originated, that were less than 20% down, and they were loans that had MI versus loans that didn't have MI, that there was a much better performance rate on those loans or a lower risk factor over default rate on those loans.
In addition, when you couple that with the cure rate, which is also higher on MI insured loans, it will be that we can show that there is an improvement in frequency, but also very importantly on severity. So when we're talking about protecting the tax payer, protecting the investor in the mortgage securities or the mortgage loans, it also reduces their loss.
So we're focused on sort of both of those, I think not only is the MI industry but also the mortgage banking industry, the realtors, the home builders and many of the consumer group are also concerned about your other point, which is what this would do to the overall housing industry and the economy. And they are both a huge concern that this would lock out a significant number of homebuyers that are in fact credit worthy, and homebuyers that we've been lending to over the last 2 1/2 years very successfully.
And that we also were lending to very successfully before the recent crisis.
Scott Frost - BofA Merrill Lynch
Okay. So just to reiterate, you're saying that loans with lower down payments that include private mortgage insurance, you're saying that there is a frequency of default mitigation, I guess, effect by using that?
And that would lower default frequency as opposed to what the regulators seem to be saying, which is it doesn't really have that much of an effect on default frequency. Is that accurate?
Teresa Bryce
Yes. I think that's right.
And I think if you look at what the regulators focused on, they were essentially trying to compare loans with less than a 20% down payment with loans, with more than a 20% down payment, which you would expect to have a lower frequency anyway. So the irony is that if you actually look at it from an investor point of view, the loans that have a 20% down payment have less protection, if you will, from investors than a loan with say a 5% down payment with MI, which actually covers the investor down to about an effective 67% LTV.
So I think a lot of it is educational in terms of helping the regulators understand this. And we've also spent a lot of time on the Hill.
There have been a number of members of Congress sent letters to the regulators that continuing to weigh in about legislative intent. When you talk to some of the folks who are involved in drafting the QRM, they say we're more focused on the risk of loss to the investor versus to this concept of frequency.
S.A. Ibrahim
It's also very clear that not all agencies involved in the initial proposed regulation agree, though we believe that there are -- there's an agency or more than an agency who certainly have a greater appreciation of our perspective.
Operator
We have a question from Douglas Harter with Credit Suisse.
Douglas Harter - Crédit Suisse AG
I was hoping you could help put in context how long the reserves you're expected -- the expected percentage that you expect to go to claim? Just help us think about that to get comfortable with the fact that those are the right numbers.
C. Quint
Well, obviously, we believe that the longer a loan stays in delinquency and moves toward being an older loan, it has a higher chance of going to claim. The one minus -- the roll rates would be the expected cure rates or now what we say the expected rates for which loans will not be claimed.
And there are several ways for that to happen. Natural cures are the most prominent.
And those are people that just find a way to make their payments, catch up and become current on their loan. The second, which is also very prominent, is modification.
And certainly in this environment, we believe that many of our delinquent loans are either in modification programs already or are candidates to be in modification programs. So certainly we expect significant mods over time in the future.
And then, the third one, which I think is more recent, is relating to loans that will not be foreclosures for reasons of documentation or servicing or other items, which is very hard to quantify at this time, but we have heard a lot of information about that from lenders, from servicers, from others, relating to loans that have been in delinquency for a long time. But there's a reason they haven't gone to foreclosure, because they lack the necessary either documentation or title or other means to become appropriate foreclosures.
Operator
We have a question from Steve Stelmach with FBR.
Steve Stelmach - FBR Capital Markets & Co.
Just to follow up on that a little bit. Looking on Page 13, Bob, is it possible to give me the historical framework around sort of claim rates per bucket, where are we today versus where it has been historically?
C. Quint
We haven't done that, certainly, directionally, Steve. The current expected low rates are higher than historic levels.
I don't think there's any secret about that. I was going to say they're there for a reason because there's very little equity, if any, in the homes.
So home prices have come down a lot, which certainly has helped determine that the lot of the loans are from vintages that were poorly underwritten. So there's a reason why they're higher.
Where they will come out, we're doing our best to project it, but there's a lot of uncertainty as we said many, many times.
Steve Stelmach - FBR Capital Markets & Co.
Yes, for sure. Any way to sort of quantify or sort of give a degree of magnitude of where expected claim rates are today versus where they were in one of the typical cycles?
Are we talking about a few hundred basis points higher? Are we talking multiples higher?
C. Quint
I think it's more the latter. But we don't have the exact numbers.
And it depends on what history you're looking at and all that. So I think it's hard to pinpoint, but I think it's safe to say that they're higher than historical average.
Operator
Our final question comes from Nat Otis with KBW.
Nathaniel Otis - Keefe, Bruyette, & Woods, Inc.
Two quick follow-ups. One, just any color on what buckets the paid claims are coming from.
Are they all coming from that 12 month and beyond bucket or is it kind of equally throughout?
C. Quint
Most of the paid claims in any quarter are going to come from the oldest bucket. There are occasions where we do pay claims from the earlier bucket but it's a very small amount.
Nathaniel Otis - Keefe, Bruyette, & Woods, Inc.
Okay. And then just lastly, you had a little bit of commentary on Jefferson County.
They were certainly hit by the tornadoes. Does the impact of the tornadoes and the impact on the local economy, is there anything that -- color you might provide on what you're thinking about that going forward with respect to your exposure?
S.A. Ibrahim
We're, of course, mindful of the fact that they're in the eye of the storm, so to speak. But with respect to the deals specifically, we don't believe at this point that the storm had a big impact on that transaction.
We increased our reserve a little bit as we disclosed. And that has more to do with the actions of the receiver thus far, and the fact that we think there's a little bit greater possibility that bankruptcy is an option that the county might pursue.
But that's still a very fluid situation.
Operator
I would now like to turn the conference over to S.A. Ibrahim for closing remarks.
S.A. Ibrahim
Thank you, operator. And I'd like to thank everybody for participating on our call, and see you next quarter.
Thanks.
Operator
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service.
You may now disconnect.