Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations. Overview The following analysis of our financial condition and results of operations should be read in conjunction with our  Consolidated Financial Statements and Notes thereto included in Item 8 and the Risk Factors detailed in Item 1A  of Part I of  this Annual Report on Form 10-K. We are a credit enhancement company with a primary strategic focus on domestic, first-lien residential mortgage  insurance (“first-lien”). We currently have two operating business segments—mortgage insurance and financial guaranty . Our  mortgage insurance segment provides credit-related insurance coverage, principally through private mortgage insurance, and  risk management services to mortgage lending institutions. See “Business—Mortgage Insurance.”  We conduct our business  primarily through Radian Guaranty Inc. (“Radian Guaranty”), our principal mortgage insurance subsidiary . Our financial  guaranty segment previously of fered direct insurance and reinsurance on credit-based risks, and also of fered credit protection  on various asset classes through financial guarantees and credit default swaps (“CDS”).  While we discontinued writing new  financial guaranty business in 2008, we continue to provide financial guaranty insurance on our existing portfolio of public  finance and structured finance credits. In addition, our principal financial guaranty subsidiary , Radian Asset Assurance Inc.  (“Radian Asset Assurance”), is a wholly-owned subsidiary of Radian Guaranty , which allows our financial guaranty business to  serve as an important source of capital support for our mortgage insurance business. See “Business—Financial Guaranty .” Prior  to January 1, 2011, we also had a third segment—financial services. See “Business—Financial Services.” As a seller of credit protection, our results are subject to macroeconomic conditions and specific events that impact the  origination environment and the credit performance of our underlying insured assets.  The most recent downturn in the housing  and related credit markets began in 2007 and had a significant negative impact on the operating environment and results of  operations for each of our businesses.  This period was characterized by a decrease in mortgage originations, a broad decline in  home prices, mortgage servicing and foreclosure delays, and ongoing deterioration in the credit performance of mortgage and  other assets originated prior to 2009 together with macroeconomic factors such as limited economic growth and a lack of  meaningful liquidity in some sectors of the capital markets. Our results of operations continue to be negatively impacted by the  mortgage insurance we wrote during the poor underwriting years of 2005 through 2008 (we refer to this portfolio as our “legacy  portfolio”). In 2012, the operating environment for our businesses improved.  Although the U.S. economy and housing market remain  weak compared to historical standards, home prices appear to be appreciating on a broad basis throughout the United States  (“U.S”), foreclosure activity has decreased and the credit quality of overall mortgage market originations continues to be  significantly better than the credit quality of our legacy portfolio. In addition, there are signs of a more permanent recovery in  the U.S. economy, including importantly, a reduction in unemployment. As a consequence of these and other factors, we have  experienced improvement in our results of operations, with a 22% decline in new mortgage insurance defaults in 2012 and  further stabilization of credit performance in our financial guaranty portfolio.  We expect these trends to continue in 2013. Currently, our business strategy primarily is focused on: (1) growing our mortgage insurance business by writing high- quality mortgage insurance in the U.S.; (2) continuing to manage losses in our legacy mortgage insurance and financial  guaranty portfolios; (3) continuing to reduce our financial guaranty exposure; and (4) pursuing opportunities for increasing  Radian Group Inc.’s (“Radian Group”) available liquidity and for enhancing Radian Guaranty’ s capital position. Although  uncertainty remains with respect to the ultimate losses we will experience in our legacy portfolio, as we continue to write new ,  higher quality mortgage insurance, our legacy portfolio progressively becomes a lesser percentage of our total portfolio.  We  anticipate that by the second quarter of 2013, our legacy portfolio will represent less than 50% of our total mortgage insurance  portfolio. In light of this important compositional change in our mortgage insurance portfolio and assuming that improving  macroeconomic trends continue, we believe we are positioned to return to operating profitability . For more information, see  “Results of Operations—Mortgage Insurance” and “Results of Operations—Financial Guaranty .”  91