BILL ANALYSIS                                                                                                                                                                                                    Ó



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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

















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