BILL ANALYSIS Ó
AB 1645
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Date of Hearing: April 6, 2016
ASSEMBLY COMMITTEE ON INSURANCE
Tom Daly, Chair
AB 1645
(Dababneh) - As Introduced January 12, 2016
SUBJECT: Mortgage guaranty insurance
SUMMARY: Prevents the imposition of financial restrictions on
writing mortgage guaranty insurance by repealing a January 1,
2018 sunset clause. Specifically, this bill:
1)Prevents the automatic re-enactment of a restriction on the
amount of mortgage guaranty insurance that a mortgage guaranty
insurer can write, absent that mortgage guaranty insurer
purchasing reinsurance on those policies.
EXISTING LAW:
1)Establishes a specific regulatory structure for mortgage
guaranty insurance that is different from the way other
insurers are regulated.
2)Defines mortgage guaranty insurance as insurance that
guarantees payment to a lender in the event of a loan default
by an insured borrower.
3)Establishes unique financial regulatory rules for this class
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of insurance because mortgage guaranty insurers are by statute
"mono-line," that is, they do not write other types of
insurance (with the resulting risk spreading.)
4)Limited, prior to January 1, 2013, the amount of risk a
mortgage guaranty insurer could assume for first liens at 30%
of the value of those first mortgages.
5)Allowed, prior to January 1, 2013, the mortgage guaranty
insurer to exceed this 30% cap if it obtained reinsurance for
risk above that level.
6)Allowed, prior to January 1, 2013, this reinsurance to be
provided by an affiliated reinsurer.
FISCAL EFFECT: None.
COMMENTS:
1)Purpose . According to the author, prior law required mortgage
guaranty insurers to acquire reinsurance that did not improve
the insurer's risk profile, was costly because the mortgage
guaranty insurer must capitalize an affiliated reinsurer to
meet this misguided requirement, and resulted in unnecessary
regulatory costs for both the Department of Insurance (DOI)
and the mortgage guaranty insurer. As a result, suspending
the rule that lead to this result made sense. However, that
suspension of the rule came with a sunset clause. Subsequent
history has shown that repealing the rule was the right
approach, and therefore making that repeal permanent is
appropriate.
According to proponents, only 2 other states still use the rule
that would be re-enacted if the sunset clause is not repealed.
In addition, the National Association of Insurance
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Commissioners' (NAIC) working group on mortgage guaranty
insurance, in the current working draft of to-be-proposed
changes to the NAIC Model Law, is deleting its recommendation
that states adopt this rule.
2)Background . The 30% cap was originally adopted in an effort
to accomplish 3 things: attract new capital to the mortgage
guaranty insurance market, spread the risk to non-real estate
based insurers, and obtain underwriting discipline by virtue
of the third-party reinsurer assuming financial risk.
However, this hoped-for market never materialized, and
mortgage guaranty insurers were left with two unattractive
prospects: (1) not continuing to write this insurance for
borrowers (often first-time borrowers who could not afford the
home without an insured loan), or (2) reinsuring with an
affiliate of a competitor. While many mortgage guaranty
insurers did this for a time, most companies found it
distasteful to have to do business, including sharing
financial information, with competitors. As a result,
affiliated reinsurers were established as a means to meet this
statutory requirement.
In more recent times, mortgage guaranty insurers have begun to
advocate the elimination of the cap since, as implemented, it
fails to meet any of the three goals that constitute the
rule's foundation. Despite significant losses as a result of
the Great Recession foreclosure crisis, which has led them to
pay lenders' claims after loan defaults at relatively high
historical levels, mortgage guaranty insurers played a major
role in maintaining what was a weak real estate market.
Ensuring that these insurers could continue to issue policies
as the real estate economy recovered was part of the rationale
for the prior legislation.
New loans, with the new stringent underwriting requirements
imposed by federal law, constitute sound business on the
mortgage guaranty insurance industry's books. Yet exceeding
the 30% cap is, in reality, a high cost, no value proposition
that does nothing to increase capacity or financial stability.
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3)Prior legislation . SB 1450 (Calderon) of 2012 repealed the
reinsurance rule, but placed a sunset on the repeal. In the
intervening years, the mortgage guaranty insurance industry
has maintained and improved its financial health, and there
appears to be no reason to not make the repeal permanent.
REGISTERED SUPPORT / OPPOSITION:
Support
U.S. Mortgage Insurers
Opposition
None received
Analysis Prepared by:Mark Rakich / INS. / (916) 319-2086
AB 1645
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