Fannie Mae, Freddie Mac tighten capital rules for PMI companies

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Fannie Mae and Freddie Mac issued new capital requirements for private mortgage insurers that will create big swings in carriers' asset reserves.

The change that had the largest impact was the removal of the credit for future premiums from the calculation of available assets.

The government-sponsored enterprises first approached the private mortgage insurers with an initial version of these proposed changes at the end of last year.

Several of the mortgage insurers then issued warnings about the negative effect the proposal would have on their capital cushion, although all added they would be able to remain in compliance with the revised requirements. A larger cushion is a measure of a company's ability to pay claims when a loan goes into foreclosure.

The updated Private Mortgage Insurer Eligibility Requirements go into effect on March 31, 2019.

"Future premiums are not included as capital under state insurance regulations nor are they included as capital under statutory accounting guidelines. If the updated PMIERs were to include future premiums in available assets while state regulators did not include future premiums in statutory capital, Freddie Mac could be exposed to the risk of statutory insolvencies and deferred payment obligations," an FAQ issued by the GSE said. Fannie Mae issued a similar FAQ.

If PMIERs 2.0 had been in effect at the end of the second quarter, MGIC's cushion would have been approximately $600 million, compared with the previously reported $1 billion. After the GSEs provided the private mortgage insurers with their initial proposal at the end of 2017, MGIC warned its cushion could be "materially lower."

PMIERs 2.0 will not affect plans for its mortgage insurance subsidiary to upstream dividends to the holding company, MGIC said.

"I am pleased that the revised eligibility requirements have been finalized so we can now turn our full attention to providing increased access to credit for consumers and reducing GSE credit risk while generating good returns for shareholders," MGIC CEO Pat Sinks said in a press release.

National MI would see a boost in its cushion, a company press release said.

National MI had PMIERs total available assets of $653.1 million, compared to risk-based required assets of $587.2 million, meaning it had a $65.9 million excess at the end of the second quarter.

Under PMIERs 2.0, National MI estimated that its total available assets would have been $681.3 million and its risk-based required assets would have been $593.6 million as of June 30, creating a pro forma excess of $87.7 million. In July, National MI obtained $264.3 million of excess of loss reinsurance coverage through an insurance-linked notes offering. That would boost its PMIERs 2.0 cushion to $352.2 million if that coverage was included in the June 30 pro forma calculation.

"Under PMIERs 2.0, Arch MI's estimated available assets as of June 30, 2018 would continue to exceed the required assets," President and CEO David Gansberg said in an email. "We don't believe the proposed changes will have a significant impact to our operations or a material impact on our capital position as of the anticipated effective date."

Arch did not provide any data regarding the size of its cushion.

The new PMIERs also formalizes guidance issued by the GSEs after the initial version became effective at the end of 2015.

"Many of the changes to the eligibility standards have been previously announced via the PMIERs Guidance," Gina Healy, Freddie Mac vice president of credit risk transfer for its single-family business, said in a press release. "Our announcement underscores Freddie Mac's commitment to working with the Federal Housing Finance Agency, mortgage insurers and other stakeholders in the housing industry to strengthen the housing finance system."

Updating mortgage insurance eligibility requirements is an important part of reducing risk for Fannie Mae, protecting taxpayers, and enhancing the mortgage insurance industry's role as a key source of private capital in the mortgage finance market," Rob Schaefer, vice president of credit enhancement strategy and management, said in a statement. "These updated requirements will bolster the continued work with our mortgage insurance partners to help families gain access to affordable mortgage credit."

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PMI GSEs Foreclosures Fannie Mae Freddie Mac FHFA MGIC