Bank of America Settlement May Bode Well for Mortgage Insurers

The mortgage crisis has certainly taken its toll on the mortgage insurance industry, and, despite some bright spots, these companies continue to struggle. Some recent lawsuit settlement news may bring some cheer, however, as it just might signal a turning of the tide in favor of insurers battling banks over toxic mortgage loans.

Plenty of grist for the lawsuit mill
Bank of America
(NYS: BAC) recently settled a lawsuit with Syncora Guarantee, a bond insurer that sued the bank over securities backed by toxic Countrywide mortgage loans. The $375 million settlement of a suit based on the allegation that Countrywide masked the poor quality of the securities to get them insured is a win for the industry -- not because the insurers are being reimbursed in totality for their losses, but because judges are ruling that the cases must be heard, and because at least some banks are negotiating and paying up, albeit without admitting fault.

Bank of America, which faces boatloads of suits alleging fraud in mortgages written by its 2008 acquisition, is also embroiled in litigation with MBIA (NYS: MBI) over such loans. The insurer may be on the brink of settling, and the Syncora accord may be just the nudge the parties need. B of A isn't the only bank being targeted, however. Radian Group (NYS: RDN) , the best-performing of the insurers, settled its own suit regarding bad loans against Deutsche Bank (NYS: DB) one year ago, though no money changed hands.

Fool's take
While still in uphill-battle mode, these companies are beginning to show signs of life. Radian recently noted that it had doubled the number of insurance policies written in Q2 from a year ago, and troubled MGIC Investment reported writing $2.2 billion in new policies for June. Genworth Financial (NYS: GNW) recently got a boost when hedge fund Highfields Capital Management increased its stake in the company, though like much of the industry, its overall performance is still shaky.

Although the legal wins and current refinance boom are great news for the industry, what is really needed to pull these companies out of the doldrums is a true recovery in housing. The evidence finally seems to point to an end to the housing bust, as conventional indicators such as housing sales and prices seem to be finally trending upward. New mortgages, rather than rewritten underwater loans, will be the lifeblood the industry needs to get back on its feet. In the meantime, insurers will take their wins where they can find them.

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Fool contributorAmanda Alixowns no shares in the companies mentioned above. The Motley Fool owns shares of Bank of America. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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