3 replies to this topic

[ogm]

Buy PMI at 30, sell PMI sept call at 2.3 You either get PMI stock really cheap or you get your 7% win. And it doesn't really matter what this market will do.

[IndexTrader]

Yeah, the call premium is very high reflecting volatility, uncertainty, and risk. Why? This company writes mortgage insurance. They insure up to the top 20% of value for loans with higher than 80% LTV. In other words, these guys are almost certain to have big losses as homes prices come under pressure. In case you don't know, when a lender takes back a house, they almost certainly will lose 20-30% from things like property damage, holding costs, costs of sale. This without any change in the value of the house. IT

[ogm]

Yeah, the call premium is very high reflecting volatility, uncertainty, and risk. Why? This company writes mortgage insurance. They insure up to the top 20% of value for loans with higher than 80% LTV. In other words, these guys are almost certain to have big losses as homes prices come under pressure. In case you don't know, when a lender takes back a house, they almost certainly will lose 20-30% from things like property damage, holding costs, costs of sale. This without any change in the value of the house.

IT

Maybe, or maybe not. They have good diversified portfolio. And not all of their mortgages will go out of business. Besides the stock reflects all these fear anyway. What in mortgate /real estate area doesn't reflect an apocalyptic scenario already. And you'll get good downside protection on this position. At 28 the stock is just plain cheap. Plus they can always raise the premuim for insurance and the borrowers will have no choice but to go along.

Insiders buying too.

This is a 3 weeks long trade at 8% return...

" LOS ANGELES, Aug 20 (Reuters) - The PMI Group Inc (PMI.N: Quote, Profile, Research), a provider of residential mortgage insurance, said on Monday it was seeing increased demand for insurance for loans with a loan-to-value above 95 percent.

A home buyer who makes a 5 percent down payment would have a mortgage with a loan-to-value ratio of 95 percent.

PMI said its U.S. and Australian portfolios are focused primarily in core housing, meaning single-family homes that are owner-occupied, and are geographically well diversified.

PMI said its portfolio, as a whole, continues to be focused on loans of modest size to individuals and families who are purchasing homes they plan to live in. "

Edited by ogm, 29 August 2007 - 11:55 AM.

[IndexTrader]

Yeah, the call premium is very high reflecting volatility, uncertainty, and risk. Why? This company writes mortgage insurance. They insure up to the top 20% of value for loans with higher than 80% LTV. In other words, these guys are almost certain to have big losses as homes prices come under pressure. In case you don't know, when a lender takes back a house, they almost certainly will lose 20-30% from things like property damage, holding costs, costs of sale. This without any change in the value of the house.

IT

Maybe, or maybe not. They have good diversified portfolio. And not all of their mortgages will go out of business. Besides the stock reflects all these fear anyway. What in mortgate /real estate area doesn't reflect an apocalyptic scenario already. And you'll get good downside protection on this position. At 28 the stock is just plain cheap. Plus they can always raise the premuim for insurance and the borrowers will have no choice but to go along.

Insiders buying too.

This is a 3 weeks long trade at 8% return...

" LOS ANGELES, Aug 20 (Reuters) - The PMI Group Inc (PMI.N: Quote, Profile, Research), a provider of residential mortgage insurance, said on Monday it was seeing increased demand for insurance for loans with a loan-to-value above 95 percent.

A home buyer who makes a 5 percent down payment would have a mortgage with a loan-to-value ratio of 95 percent.

PMI said its U.S. and Australian portfolios are focused primarily in core housing, meaning single-family homes that are owner-occupied, and are geographically well diversified.

PMI said its portfolio, as a whole, continues to be focused on loans of modest size to individuals and families who are purchasing homes they plan to live in. "

I'm not suggesting all their loans will go bad, and clearly, the stock reflects some of the problems. I won't say "all the problems" because we really don't know what those problems are yet. Then too, the call premium also reflects some of the underlying risk and volatility.

That said, you can see for yourself the business they're in from the blurb you posted. If the lender makes a 95% loan, these guys in sure that top 15%, so that the lender is only on the hook for 80%. If this loan goes bad, they will in all likelihood have a claim for the entire amount of the insurance. To show how easily this happens, the original $100K property dips to $90K. A real estate agent is hired to sell the property at a cost of 6%, or $5400. Closing costs, prorated taxes, insurance while they own the property, perhaps utilities. That wipes out the rest of it.

By the way, they may well be able to raise their insurance premium. On the other hand, I would expect premium income to decline right along with home sales. In fact, as lenders tighten the types of loans they will offer, this alone decreases the premiums. I'd say income is under pressure in the future, along with rising losses from insurance claims. This is a nasty cycle for them. But again, as you said, this is doubtless reflected to some degree in the current price. We'll see how much.

IT

Edited by IndexTrader, 29 August 2007 - 12:13 PM.