Mortgage Insurers Don't Get Their Wish in New GSE Capital Rules

The final rule outlining new eligibility criteria for private mortgage insurers of Fannie Mae and Freddie Mac loans lacks a key feature that many industry participants had sought: the ability to count future insurance premiums towards capital reserves.

The issue was the linchpin of the changes that legacy PMI companies advocated for in the final rule of the Private Mortgage Insurer Eligibility Requirements, or PMIERS, which was issued Friday by the two government-sponsored enterprises under the guidance of their conservator, the Federal Housing Finance Agency.

"Future premiums are not included as capital under state insurance regulations, nor are they included as capital under statutory accounting guidelines," reads a Fannie Mae statement outlining the new requirements. "If the revised PMIERs were to include future premiums in available assets while state regulators did not include future premiums in statutory capital, Fannie Mae could be exposed to the risk of statutory insolvencies and deferred payment obligations."

Freddie Mac issued its own statement with a similar explanation.

The new rule will become effective Dec. 31, and insurers will face the prospects of raising capital reserves to meet the new requirements ahead of a March 1, 2016 deadline to certify their compliance. Firms like Radian Group wanted regulators to allow insurers to count in their reserves the unearned portion of single-premium policies that are collected at loan closings and are nonrefundable. When the capital standards were first proposed last year, Radian argued that without the provision for unearned premiums, it would need to add $450 million to its capital allocations.

Still, the industry's trade group, USMI, said in a press release Friday it "appreciates the efforts of FHFA and the GSEs to work with all interested parties to finalize the updates" to the rule.

A press release from Essent Group, one of two private mortgage insurers created after the housing crisis, stated it has sufficient assets to meet the total risk-based required asset amount of the final rule.

The capital requirements create "an important set of national standards that give industry counterparties more transparency into the claims paying capacity of private mortgage insurance companies, including Essent," said Mark Casale, chairman and CEO of the Hamilton, Bermuda-based holding company.

The revised rule does credit PMI firms for 210% of annual premiums toward the available asset calculation for loans originated prior to 2009. This limited inclusion of future premium income will be phased out as pre-2009 policies run-off. And as these premiums come on to the balance sheet, they will be counted towards the available asset threshold.

Another risk of including future premiums towards capital was that it could incentivize insurers to write uneconomic business to simply increase short-term income in order to pay legacy claims.

One change that was made between the draft and final versions of the rule is the addition of a table of explicit seasoning factors for performing loans originated after June 2012. Performing loans originated before the cutoff will maintain a vintage-based approach for calculating insurers' asset reserve allocations, Fannie Mae said.

The tables that calculate insurers' "Risk-Based Required Asset Amount" were recalibrated using the Federal Reserve's latest forward-looking Comprehensive Capital Analysis Review house prices, interest rates and unemployment paths. The tables will be updated at least every two years, but may be updated more frequently if there is a significant change in market conditions.

United Guaranty Corp., headquartered in Greensboro, N.C., already undergoes CCAR stress testing because its parent company, American International Group, is considered a nonbank systemically important financial institution, its press release on the final rule noted.

Fannie Mae and Freddie Mac also adjusted the multiplier for debt-to-income ratios to apply to loans with a DTI of more than 50%; the proposal had the multiplier kick in at a DTI of over 43%.

They also added multipliers for cash-out refinance loans and mortgages with terms shorter than 20 years. The latter multiplier is a reduction for the amount of available assets to be held as capital.

The companies are also considering making changes to the capital rules when it comes to lender-paid mortgage insurance. The LPMI policies are not cancellable, unlike borrower-paid policies. Fannie Mae and Freddie Mac are evaluating the effect the longer risk exposure of LPMI will have on the MIs.

On the loan default side, the original proposal called for delegation of loss mitigation authority to Fannie Mae and Freddie Mac to allow them to implement foreclosure alternatives. Under the revised PMIERs, the MIs have the option not to provide full delegation, but Freddie Mac may assess a fee instead of a loan-level price adjustment to cover higher loss management costs.

The mortgage insurers have also expressed concerns that providing insurance for the lower end of the credit spectrum could become very expensive for consumers. But each insurer will have to look at the requirements and make their own pricing decisions, representatives from FHFA, Fannie Mae and Freddie Mac said during a media briefing.

Officials discussed the restructuring of GSE loan guarantee fees that the FHFA also announced Friday. The combined effect that the G-fee and PMI changes will have on mortgage insurance pricing is unclear because pricing varies by individual company, they said.