Regulators Snub Mortgage Insurance in New Capital Rules

Federal banking regulators have proposed new capital risk weightings for residential mortgages that advantage government-guaranteed loans but impose higher capital requirements on conventional loans – even with private mortgage insurance.

Federal Housing Administration, Fannie Mae and Freddie Mac loans would continue to enjoy a 20% risk-weighting under a proposal the regulators have issued for public comment.

Other plain-vanilla conventional loans with loan-to-value ratios above 80% that currently have a 50% risk weight due to private mortgage insurance could end up with a 75% or 100% risk weighting.

The standardized approach to risk-weighted assets “would not recognize private mortgage insurance for purposes of calculating the LTV ratio,” according to the Basel III capital proposal.

Non-traditional loans are treated even harsher -- with risk-weights as high as 200%.

The Federal Deposit Insurance Corp. and other regulators published the joint proposal on June 18 for a 90-day comment period that ends in September.  If finalized, the new risk weightings would not go into effect until 2015.

The Mortgage Insurance Companies of America did not respond to a request for comment on the capital proposal.

The higher capital requirements will make it more expensive for banks to serve first-time homebuyers and underserved groups, according Laurence Platt, a partner at K&L Gates.

“Through regulation, they are forcing lenders to originate loans in a very narrow box,” the K&L Gates partner said. 

The standardized approach would apply to nearly every bank that holds securitized mortgages or whole loans in portfolio.

“The standardized approach is going to be broadly applied to every institution. 

It doesn’t count PMI which has a lot of banks concerned,” said Hugh Carney, senior counsel at the American Bankers Association.