Pending deal could give Phila. mortgage firm more resources

Posted: May 19, 2014

Radian Group Inc.'s plan to buy Clayton Holdings for $305 million gives the Philadelphia mortgage insurer several new services for the mortgage sector - but one of them could be especially lucrative.

During the housing boom a decade ago, Clayton, of Shelton, Conn., was a major provider of third-party "due diligence" services to Wall Street firms that packaged mortgages into what are called private-label residential mortgage-backed securities.

The "private" portion of that unwieldy name distinguished them from similar bundles of mortgages sold by government-backed mortgage giants Fannie Mae and Freddie Mac.

At the peak of the market in 2006, $725 billion in private-label mortgage securities were issued. "It's currently only a fraction at about $30 billion," Radian chief executive S.A. Ibrahim said during a May 7 conference call on Radian's first-quarter earnings and on the Clayton deal.

"The private-label securitization piece of the market has been missing since the downturn, but it is likely to come back," Ibrahim said in an interview.

"We know that everybody in Washington we talk to is working toward making that private-label market come back, on both sides of the aisle in Congress," Ibrahim said.

If that happens, the Clayton deal "could be extremely profitable to us," Ibrahim said, but "it is still profitable to us even without that coming back."

That's because mortgages have risks for Radian's clients - banks and other mortgage lenders - that go beyond whether the loan will be repaid. That is credit risk, and Radian's mortgage insurance protects against that risk by reimbursing lenders for a portion of the loss when borrowers default.

But during the housing bust, all sorts of additional problems arose involving the way the loans were made and later in the way the loans were serviced. In many cases, if rules weren't followed, the financial entity holding the loan was on the hook for a loss.

In addition to helping with securitization, Clayton reviews how loans are underwritten, monitors how they are serviced, and, as a last resort, helps sell properties lenders have repossessed.

"We knew that Clayton was the leader of the pack" in those types of services, Ibrahim said, and it made more sense for Radian to buy Clayton than to build those services itself.

The deal for Clayton, which last year had net income of $9.1 million on $135 million in revenue, is expected to close this summer. Clayton employs 700.

Radian, which employs 1,056, including 610 in Center City, is in a position to expand because of a decision made in 2008, when the nation was in the deepest throes of the financial crisis and it wasn't clear that private mortgage insurers would survive.

That's when Radian started hiring new salespeople and expanding its customer base, with an emphasis on community banks and credit unions.

That new business enabled Radian, now the largest mortgage insurer to have an operating profit in last year's fourth quarter, to post its first quarterly operating profit since 2007, Ibrahim said.



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