Photo: Image courtesy of Hayman Capital
Texan hedge fund manager Kyle Bass, the founder of Hayman Capital, spoke at the University of Virginia Investing Conference in Charlottesville yesterday evening. As expected, Bass presented his thesis on European sovereign debt and Japan.
However, during the Q&A session, he gave another investing idea to the audience. It has to do with the mortgage insurance business.
Earlier this year, Bass got out of his position in mortgage insurer MGIC and put all that money in a new company called National Mortgage Insurance (NMI), he told the audience.
First, let’s review his MGIC investment story.
In November 2011, Bass, who famously bet against the subprime housing market, disclosed a sizable stake in Milwaukee-based MGIC — the largest mortgage insurance company in the U.S.
He got out of that position earlier this year, but he has not lost faith in the mortgage insurance industry.
In fact, that investment paid off for him. Bass said Hayman bought MGIC at $2 and sold at $4.80.
“That was one of the better things we have done year this year,” he said noting they had about 5.5% of the company.
During the financial crisis, Bass explained that the mortgage insurance business got decimated and a few of them have “gone the way of the Dodo bird.”
A few of them still exist and he explained why he invested with MGIC.
“A few of them still exist and you’re trying to model when peak losses are going to be through the system because all the sudden new defaults are falling on the back end. So we were looking at the liquidation value of MCIG. They didn’t write any new insurance. We actually thought it was worth about $3.50 when we paid $2 for it,” he said.
Hayman got out of that position when MGIC released some quarterly data that suggested their cure rates for new defaults had fallen off a cliff. He said they called up the company and asked what’s happening because Hayman’s model suggested they cure rates should be better than what they were experiencing, Bass told the audience.
‘They said, ‘We don’t really know’ and I said, ‘Ok. We need to sell that then.’ So we sold it because the equity had not moved yet,” he said.
Now he has another investment idea in the mortgage insurance space, which is NMI.
Bass said there are two key sides to the mortgage insurance business.
“There are the banks underwriting the mortgages and then buying the insurance from the insurance providers and that’s a business for the insurance providers and the insurance providers want to keep that relationship with the bank.”
However, Bass thinks there’s a lot of friction in that business today from when banks were writing bad loans by not verifying income.
Bass believes that can change if you show up with new money, and a new company and a new licence issued by Fannie or Freddie.
That’s why Hayman Capital teamed up with Richard Perry’s Perry Capital and Barclays on NMI, which has $500 million in private capital.
“We started calling banks and said, ‘Hey if we show up with a great management, new capital and no friction will you give us market share?’ They said ‘You’ll have it overnight.'”
However, what they need is Fannie or Freddie approval so it does have its risks.
Bass believes the moment they get Fannie and Freddie approval then they could get a New York Stock Exchange listing. He believes that stock has the potential to double.
Hayman currently owns 9.9% of NMI and Bass sits on the company’s board. It trades in a portal at around $10.75 or $11, he added.
Business Insider Emails & Alerts
Site highlights each day to your inbox.