The consolidation in the mortgage industry continues as MGIC Investment Corp. is buying the 3rd largest mortgage insurer Radian Group Inc. for 4.9 billion dollars. The mortgage insurance industry has been fairly stagnant as homebuyers are using tools such as piggyback mortgages that alleviate the need for expensive mortgage insurance.

Milwaukee-based MGIC will exchange 0.9658 share of its stock for each share of Philadelphia-based Radian, paying no premium to Radian’s $61.28 closing share price on Feb. 2, the companies said in a statement. Shares of MGIC surged 11 percent yesterday, the biggest one-day gain in more than three years. Radian climbed 9.3 percent.
The new company, in control of about a third of the country’s mortgage insurance market, plans to cut almost a quarter of its combined costs to boost profit as demand for protection against home-loan defaults wanes. MGIC also will get a foothold in bond insurance — a market PMI Group Inc., the number two mortgage insurer, entered in 2003.
“If I’m MGIC, it gets me out of a competitive box and into new businesses at a relatively cheap price,” said Matthew Roswell, an analyst at Stifel Nicolaus & Co. in Baltimore. He has a “buy” rating on MGIC and a “hold” rating on Radian.
In the United States, mortgage insurers have been hurt by second, or “piggy-back,” loans, which eliminate the need for insurance on mortgages with low down payments. MGIC and Radian are expecting to cut about $128 million in expenses by 2009 and are targeting opportunities to grow overseas, where some markets are nascent. via The Boston Globe

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