Single-family mortgages with low LTVs and private mortgage insurance would end up in favorable risk buckets under a new risk-based capital proposal federal banking regulators are issuing for comment.Under the RBC proposal, known as Basel Ia, a single-family mortgage with a 100% loan-to-value ratio and loan-level PMI would fall into a 35% risk bucket, assuming PMI covers the first $20,000 in losses on a $100,000 loan. The current Basel I RBC standard assigns most conforming mortgages to a 50% bucket, which translates into a 4% RBC requirement. The regulators will not accept portfolio or pool-level PMI under the Basel Ia proposal, although the agencies are seeking comment on that issue, as well using credit scores to reduce capital requirements. The advance notice of proposed rulemaking, which is being issued for a 90-day comment period, is very general, and the regulators say they are open to suggestions and changes. Basel Ia is designed to enable most domestic banks to compete in the mortgage sector and other business lines when the largest banks start to implement a Basel II RBC standard in 2008.

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