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Mortgage guaranty insurance gets many hands for capital reforms

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Indianapolis–The mortgage guaranty insurance model law is on its way toward a new capital model with the help of the mortgage insurance industry and consulting firm Oliver Wyman.

At the same time, the Federal Housing Finance Agency (FHFA) is working to develop its own standards, while the Government Accountability Office (GAO) has begun its own analysis of the fraught industry, according to NAIC staff at the summer national meeting, being held now in Indianapolis.

All stakeholders are trying to get one framework “we can all agree upon,” said longtime financial regulator Steve Johnson, deputy of the Pennsylvania Insurance Department, during a meeting of the National Association of Insurance Commissioners’ (NAIC) Mortgage Guaranty Insurance Working Group Friday evening.

Indeed, the Joint Forum of the International Association of Insurance Supervisors (IAIS), the Basel Committee on Banking Supervision and the International Organization of Securities Commissions issued a set of recommendations for jurisdictions Aug. 20 that says policymakers should consider requiring mortgage originators and mortgage insurers to align their interests. 

The final report, “Mortgage insurance: market structure, underwriting cycle and policy implications,” discusses various means of aligning financial interests, including partial risk retention and having the banking and insurance supervisors consider jointly collaborating on any sharing mechanisms. “When losses are shared, it is important that claims costs are controlled by the party with the greatest exposure. In most cases, this will be the mortgage insurer,” the paper noted. Of course, the paper also recommends that regulators ensure that mortgage insurers and mortgage originators maintain strong underwriting standards

During the meeting, the private mortgage guaranty industry association updated the NAIC group on work performed so far by Oliver Wyman.

The industry wants a measurement of solvency in the new capital model and wants the model to pass a stress test at least as adverse as the financial crisis that roiled the mortgage insurance industry during the great recession. International standards also may come to bear with capital adequacy tests, as well.

The industry model will be distributed to the working group around the time of the spring national meeting and  regulators can discuss it or use it for the amended model law. Earlier this summer, the NAIC Executive Committee ok’d the model law development. 

The NAIC is working with federal regulators, some of whom attended the meeting and met with the working group afterward in a closed session. 

At the end of the Houston-based NAIC spring meeting in early April, the Consumer Financial Protection Bureau (CFPB) announced  from Washington that four companies would pay $15.4 million in penalties to end what the Bureau believes to be improper kickbacks paid by mortgage insurers to mortgage lenders in exchange for business. Then, NAIC CEO Ben Nelson got involved.

Nelson met with CFPB Director Richard Cordray and began what the NAIC staff described as an ongoing dialogue on the issues. NAIC staff reported the CFPB wants to work with state regulators on mortgage insurance.

The CFPB stated in its enforcement proceedings the insurers’ practices have been prevalent for more than 10 years.  

The Obama Administration is also involved  in having jumped into Washington’s efforts to ultimately close shop on Fannie Mae and Freddie Mac and turn the government-sponsored enterprises (GSEs) that finance mortgages either into a utility or over to the private sector entirely. Both the House and the Senate kicked up the dust with bills that diverge a great deal.

The NAIC legislative staff believes that the Senate bill, the Jumpstart GSE Reform Act, S. 1217, will be closer to what Obama lays out as part of the plan the President announced Aug. 6.

“We know our housing finance system is not sustainable in its current form, and this legislation will keep us on a path to accomplish real reforms. We believe that as we transition Fannie and Freddie out of their present roles, we need to think about the system in its entirety,” said Sen. Mark Warner, D-Va., part of a team of U.S. Senators, including Bob Corker, R-Tenn., David Vitter, R-La., and Elizabeth Warren, D-Mass., members of the Senate Banking, Housing and Urban Affairs Committee, who introduced S. 1217.

Mortgage guaranty insurers more than doubled their losses in 2011, suffering a $5 billion hit compared to the $2.5 billion deficit reported in 2010, according to a report last year from Weiss Ratings.

According to Standard & Poor’s, losses generated from the insurers’ 2005-2007 books of business still outweigh any profits that have resulted from newer, higher credit quality business. Losses are expected to persist through 2013 into 2014, although new defaults should keep trending downward unless there is another market downturn, the NAIC says. After the runoff of Old Republic International Corp.’s mortgage guaranty business and the bankruptcy of PMI Group, the industry is dominated now by only four players: MGIC Investment Corp.; Radian Group; Genworth Financial; and AIG. An analysis of fourth quarter 2011 data found that of these, only the AIG group reported a profit, earning $109.4 million — the other three groups recorded a combined loss of $1.7 billion. 


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