Last March I suggested that mortgage insurance companies such as MGIC Investment Corp. (NYSE: MTG) might be in some peril. Since then, MTG stock has lost 76% of its value.

Back then, MGIC had negotiated a merger with Radian Group Inc. (NYSE: RDN) but that deal fell apart in September. Both mortgage insurers were on the hook if mortgagees ended up not making their payments. But mortgage insurers hoped they would be able to argue that they didn't have to pay if they could prove there was mortgage fraud.

Last March I hesitated to recommend shorting MGIC since it was generating cash and had ample capital. But since then its credit rating has been downgraded, which makes it hard for it to position itself as an insurer. This after it restructured a subprime-mortgage joint venture without a bankruptcy filing, amid news that it received a request from the SEC to provide information related to the joint venture.

With its stock down 11% today and a 24.2% short interest, it's clear that investors see blood in MGIC's water.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.