MI Capital is Strong
New Capital Standards Further Enhance Reliability
Mortgage insurers have new higher capital standards under the Private Mortgage Insurer Eligibility Requirements, or PMIERs, which are the set of requirements for mortgage insurers to be approved to insure loans acquired by Fannie Mae and Freddie Mac (the GSEs).
These requirements include:
- Financial requirements to ensure that “[a]pproved Insurers have adequate liquidity and claims-paying capacity during periods of economic stress”;
- Business requirements to identify, measure, and manage exposure to counterparty risk; and
- Quality control requirements regarding underwriting and eligibility guidelines, data accuracy, and fraud prevention.
These robust operational and financial standards provide confidence to market participants and policymakers of the long-term value and role of a strengthened MI industry.
PMIERs nearly doubled the amount of capital each mortgage insurer is required to hold. Most mortgage insurers now must hold capital assets over 7 percent, compared to the 2 percent capital standard at FHA. While each GSE has a capital buffer of $600 million in 2017, according to the terms of the senior preferred stock purchase agreement with Treasury, by 2018, the GSEs are required to be at 0 percent capital under conservatorship. More capital further boosts the MI industry’s ability to pay claims in good times and bad.
All mortgage insurers have met or exceeded PMIERs requirements as of December 31, 2015. Mortgage insurers have raised $9 billion in new capital since the financial crisis, and are well positioned to raise additional capital to meet demand.
The MI industry is backed by private capital, which stands ready to take on first loss mortgage credit risk ahead of the taxpayer. In contrast, the GSEs are government-controlled entities that expose taxpayers to losses from mortgage credit risk.
The revised PMIERs are an important part of the significant efforts of policymakers and the MI industry to address lessons learned from the housing downturn. In October 2014, the mortgage insurers implemented new master policies that provide assurances about the consistent handling and payment of mortgage insurance claims and bring greater transparency and clarity to contractual protections for lenders and investors. Additionally, USMI members are working closely with the National Association of Insurance Commissioners’ Mortgage Guaranty Insurance Working Group as it updates the Mortgage Guaranty Insurance Model Act to strengthen state regulatory standards regarding MI.
PMIERs create the strong foundation for efforts to further “de-risk” the GSEs through expanded use of private capital with MI. When combined with the new master policies, PMIERs set the stage for MI to provide deeper cover through front-end risk sharing.
