BILL ANALYSIS Ó AB 1645 Page 1 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 AB 1645 Page 2 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 According to proponents, only 2 other states still use the rule that would be re-enacted if the sunset clause is not repealed.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 AB 1645 Page 3 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. AB 1645 Page 4 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 Page 5