With principal writedowns my guess is that the owners of the insurance, the banks, who are going out of pocket to continue to pay the premiums are going to lump the loans with MI in the "not so fast to writedown "category. I mean they were paying this insurance for decades and it was a waste of resources for them to be paying it, they are not going to be willy nilly about who they are going to do a principal writedown with, it is going to be a cold and hard calculated dollar for dollar exercise and the MI's are really going to be helped marginally. For the investment community to han their hats on this, it is nothing but blind faith, it is not an exercise of empirical study.
The MI stocks have rallied upon this great hope, but the more and more you think of it, there is only one way for this scene to play outand it is simply the free market. Although I think the national median home price is somehwat in line with past 20 30 and 40 year historical inflation and price appreciation rates, unfortunately, our banks are still saddled with tens of billions of losses and are just starting their long path to re-earning their balance sheets into a position to lend again.
It seems like a fairly safe bet that banks will not be willing to write down principal on loans with mortgage insurance unless the mortgage insurer is willing to eat a share (probably most) of the loss. The same probably goes for second liens.
If the mortgage insurers are not willing to cooperate, there is a good chance that banks will publicly cite mortgage insurance as a reason for refusing to write down principal on some loans.
If the new program has an impact, it could accelerate mortgage insurers' demise. Even though it might reduce ultimate loan losses (I am hopeful that it will achieve this), it could accelerate defaults, which will in turn accelerate loss reporting.