Legacy mortgage insurers are embracing a recent federal capital-retention proposal, even though it will demand more of firms that have larger volumes of insurance on high-risk loans.
Private mortgage insurers currently have to satisfy differing capital rules set by a number of states, but the Federal Housing Finance Agency's
They generally agree that the FHFA proposal would offer more clarity than the existing regulatory framework, and they consider palatable the plan to base capital requirements on the quality of loans they insure.
Still, they are raising concerns about some of the details. Legacy and startup firms would be affected differently by the requirements, but they tend to agree on the flaws in the proposal, which Radian Group's CEO recently described as "onerous."
"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," S.A. Ibrahim, the chief executive of Philadelphia-based Radian, said during a financial services conference in New York on Sept 9.
In a comment letter to the FHFA, Radian took 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 the company would have to add to its capital if the rules were enacted immediately, "so it's fairly significant in relation to the
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 FHFA proposal would reduce the risk to the GSEs, and that should be
A good sign for the MIs is the overlap in the industry comments about the proposal.
"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," Ibrahim said. "So that has to create a pretty powerful voice in Washington."
MGIC Investment Corp. Chairman and CEO Curt Culver
MGIC is generally supportive of the capital rules but took issues with certain risk requirements in the initial proposal. It expects the FHFA to see things its way when it comes to modifying the rules. "We have the angels on our side relative to the arguments," Culver said.
The proposal would solidify the capital base of the private mortgage insurance industry, and it would give the MIs "a place at the table" when it comes to discussing such issues as risk-sharing arrangements with the Federal Housing Administration and an expansion of what the GSEs will allow them to insure, he said.
Genworth is also advocating for 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 counterparties for the GSEs and any unintended consequences of those standards," such as increasing the cost of mortgages for consumers, Genworth Mortgage Insurance Co.'s President and CEO Rohit Gupta said 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.
Genworth's comment letter on the proposal called for more transparency from FHFA about how it came up with the capital standards, calling it essential for business-planning purposes.
"Our feedback is about striking the right balance with the standards," so that they don't unintentionally raise the cost of mortgage insurance for consumers, Gupta said.
Startups such as National MI and Essent differ with the legacy companies about how conservative the capital standards should be.
"We think they are a little too conservative and maybe some of the other [MIs] might think they are more than just a little too conservative," said the chief risk officer of Emeryville, Calif.-based National MI, Patrick Mathis. Without the book of business written during the bust clouding its financials, National MI made it comments based on how it believes the standards will affect the MI business going forward.
Like Genworth, the National MI executives urged FHFA to be more transparent about how it determined the capital levels. In its conversations with the agency, National MI got some generalities but no clarity, said Rob Smith, National MI's vice president of pricing.
"We are totally aligned with the legacy players on that issue as well," Smith said.
Every one of the private MIs "stand ready, willing and able to put more of our private capital to work to protect the GSEs and therefore the taxpayers even more," National MI's Mathis said.
