Legacy mortgage insurers welcome the level playing field that will come with a recent capital retention proposal, even though the new requirements will have a greater impact on firms that have larger volumes of insurance on high-risk loans.
There’s no single national regulation for capital requirements on private mortgage insurers because rules are currently set on the state level. MI firms generally agree that the Federal Housing Finance Agency’s proposed retention requirements offer more clarity than the existing framework and find the plan to base capital requirements on the quality of loans they insure palatable.
While the two segments of the MI sector will be impacted differently by the requirements, both legacy and startup firms share common ground in pointing out flaws in a set of rules that Radian Group’s CEO described as “onerous” during a financial services conference in New York on Sept 9.
“There’s been a high degree of unanimity and common view and even common data in terms of us questioning the justification for some of those standards,” said S.A. Ibrahim, the chief executive of Philadelphia-based Radian.
In a comment letter to the FHFA, Radian takes issue with capital reserves not being credited for the unearned portion of single-premium policies that are collected at loan closings and are not refundable.
For Radian, that amounts to $450 million, “so it’s fairly significant in relation to the overall shortfall,” the company would have if the rules were enacted immediately, Cathy Jackson, Radian’s senior vice president and corporate controller, said at the conference.
Radian also would like to see credit given to future premiums for policies with monthly paid premiums. The FHFA proposal requires holding capital against losses that are expected over the life of loans, but doesn’t take into account that the risk is reduced over time, the company noted.
While most states do not have a minimum capital standard for mortgage insurers, those that do use either a risk-based capital ratio test or minimum policyholder position test. However, the government-sponsored enterprises already have their own capital standards to approve the mortgage insurers they do business with.
The new capital standards will reduce the risk to the government-sponsored enterprises, and that should be reflected in guarantee fees and loan-level price adjustments, Ibrahim said.
A good sign for the MIs is the comments that are coming in from others regarding the capital requirements. “It’s hard to guess exactly how Washington will act, but the only thing that I’d draw strong encouragement from is the breadth of the comments coming from so many different entities and constituencies and the remarkable consistency in terms of everybody making the same three or four points. So that has to create a pretty powerful voice in Washington,” Ibrahim said, echoing similar comments made by MGIC Investment Corp. chairman and CEO Curt Culver at the same conference.
Separately, Genworth in its own comment letter also discussed getting capital credit for future premiums and reducing the amount of capital to be held on seasoned loans.
“FHFA has to strike a balance between standards that are setting up MIs as strong counter-parties for the GSEs and any unintended consequences of those standards,” such as increasing the cost of mortgages for consumers, said Genworth Mortgage Insurance Co.’s president and CEO Rohit Gupta in an interview with National Mortgage News.
The creation of the standards is an important initiative from the FHFA and the GSEs and Genworth appreciates their work, because once the standards are finalized they will reinforce the role of MI in the housing finance system, he said.