BILL ANALYSIS
SB 291
Page 1
Date of Hearing: July 8, 2009
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
SB 291 (Calderon) - As Amended: June 26, 2009
SENATE VOTE : Not Relevant
SUBJECT : Mortgage Guaranty Insurance
SUMMARY : Provides the Insurance Commissioner (IC) the
discretion to order a mortgage guaranty insurer to cease writing
new business if the IC determines the insurer's overall
financial condition does not support the insurer being permitted
to transact new business in California.. Specifically, this
bill :
1)Specifies that the required amount of policyholder surplus
that a mortgage guaranty insurer must maintain shall exclude
the principal amount of a loan that is in default if the
insurer has set aside a separate loss reserve for that loan,
and the reserve is equal to or greater than the amount of
surplus that would have been required for that loan.
2)Provides that if an insurer has reason to believe that its
policyholder surplus will fall below the level required by a
statutory formula, the insurer shall notify the IC as soon as
practicable that its surplus will fall below the amount
required by the formula.
3)Authorizes the IC to issue an order to the insurer to cease
writing any new business until its policyholder surplus
satisfies the statutory formula.
4)Provides that the IC may retain, at the insurer's expense, any
experts necessary to evaluate the issues necessary to
determine whether or not to order the insurer to cease writing
new business.
5)Entitles the insurer to a hearing, unless waived by the
insurer, prior to the IC issuing an order to cease writing new
business, and provides that the cost of the hearing shall be
borne by the insurer unless it has waived its right to a
hearing.
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EXISTING LAW :
1)Requires all insurers licensed to transact insurance in
California to file annual and quarterly financial statements,
an annual audit by a licensed certified public accountant, and
such other financial information as the IC deems appropriate.
2)Authorizes the IC to require any licensed insurer to file
additional financial statements, including monthly statements,
if the IC, in his or her discretion, deems it necessary for
the protection of the public.
3)Provides the IC with broad authority to examine all aspects of
the financial condition of any licensed insurer, including
having financial examiners examine the insurer's books and
records on site, at the expense of the insurer.
4)Provides the IC with broad authority to issue orders to any
insurer, including orders to cease writing new business in
California, to obtain new capital as a condition of continued
writing, or other orders deemed necessary by the IC to protect
the public.
5)Authorizes the IC to issue a seizure order without a hearing
and to immediately seize control of the assets, property and
operations of an insurer if the insurer is insolvent or the
continued operation of the insurer would be hazardous to its
policyholders, creditors or to the public.
6)Defines Mortgage Guaranty Insurance as insurance against
financial loss as the result of the nonpayment of principal,
interest or other sums agreed to be paid on a note or loan
secured by a mortgage or deed of trust on real estate.
7)Provides that mortgage guaranty insurers are not authorized to
transact any other type of insurance, and an insurer that
transacts other types of insurance is not eligible to seek a
license to transact mortgage guaranty insurance.
8)Provides a series of specific limitations on the type of risks
a mortgage guaranty insurer can assume, as well as limitations
on the concentration of risk in relation to its financial
status that it can assume.
9)Requires a mortgage guaranty insurer to establish a
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contingency reserve and hold those reserves for ten years
before releasing the assets as unrestricted surplus.
10)Prohibits a mortgage guaranty insurer from withdrawing funds
from its contingency reserves without the approval of the IC.
11)Provides that, in addition to requirements for
paid-in-capital and contingency reserves, a mortgage guaranty
insurer shall maintain additional policyholder surplus
pursuant to a formula established by statute.
12)Requires a mortgage guaranty insurer to cease writing new
business in California if it fails to meet a statutory
policyholder surplus requirements formula, even if it is still
financially healthy. The IC does not have any discretion to
waive or modify this bright-line rule.
13)Grants the IC broad authority to adopt regulations to
implement the provisions of the Mortgage Guaranty Law.
FISCAL EFFECT : Absorbable costs to the Department of
Insurance, which are fully recoverable from the insurer being
reviewed.
COMMENTS :
1)Purpose . The author introduced this bill to respond to the
threat that existing law would, due to the inflexible
statutory surplus rule, cause a substantial portion of the
mortgage guaranty insurance market to discontinue writing new
business in California. The consequences of such a market
contraction could be devastating to the California residential
real estate market, because the secondary lending markets
require mortgage guaranty insurance on any residential loan
where there is less than a 20% down payment. With the economy
in such a deep recession, and with the crash of the
residential real estate market such a substantial cause of the
recession, the shock waves of eliminating from the market
buyers who do not have 20% of the purchase price for a down
payment would cripple the barely recovering residential real
estate sector. The goal of the legislation is to modernize
the financial regulation of mortgage guaranty insurers by
eliminating an outdated, inflexible rule, and at the same time
ensuring that the Insurance Commissioner has all of the tools
necessary to effectively regulate this industry.
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2)Background . Most residential property loans for more than 80%
of the appraised value of the home can be made by lenders only
if there is mortgage guaranty insurance on the loan. Fannie
Mae and Freddie Mac - the two primary secondary market
purchasers of home loans - both require this insurance. FHA
loans, and loans that a lender keeps in its own portfolio are
not subject to this requirement. However, the vast majority
of loans are placed into the secondary market, and a
substantial contraction of the availability of mortgage
guaranty insurance would unquestionably lead to a contraction
of the availability of loans to many borrowers.
There are six mortgage guaranty insurers licensed to conduct
business and currently transacting in California, and as a
result if even one of these companies was forced to cease
writing by an outdated, inflexible statutory formula, the
market could be disrupted. If several of these insurers were
forced to cease transacting business, the consequences could
be serious for the California economy.
It is not surprising that mortgage guaranty insurers are
currently experiencing unusually high claims experience. The
record foreclosures that are currently occurring on properties
with market values below the level of debt are causing
mortgage guaranty insurers to pay unusually high amounts in
claims. However, the whole structure of this type of
insurance is built on the premise of long periods of
relatively low claim experience followed by intervals with
short periods of high claims experience. Thus, there are
special reserving requirements, risk concentration rules, and
other features designed to prepare mortgage guaranty insurers
to weather a market in today's condition. The hang up is an
inflexible surplus ratio rule that was adopted on the basis of
one 1961 study that estimated a range of "safe" ratios. Most
importantly, this fixed ratio rule was adopted at a time when
the Insurance Commissioner did not have the broad range of
financial regulation tools now available to him. "Surplus" in
this context refers to funds set aside by the insurer in
addition to required paid in capital, and in addition to the
highly regulated reserves for both known and anticipated loss
payments.
3)New writing in a "bad" market . If the real estate market is
in such a shambles, with continuing record-level foreclosures,
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why is it better to allow mortgage guaranty insurers to keep
writing business if the existing bright-line rule is crossed?
There are at least 3 reasons to conclude that it is, in fact,
prudent to modify the current rule. First, there is no real
evidence that the inflexible rule is crucial to financial
health of a mortgage guaranty insurer. Second, the Insurance
Commissioner, under this proposal, retains the full range of
authority to shut down an insurer if the actual analysis of
its financial condition shows that it should not be writing
new business. Third, it is important to recognize that the
quality of loans for which claims are being paid, and the
quality of loans that will be insured with new writing, are
very different. Loans subject to claims were made during the
unfortunate era of uncontrolled lending when appraisals,
income verification, and a whole host of other underwriting
rules were widely ignored. Part of the fallout from that era
is that new loans are being underwritten carefully and
prudently. As a result, the premium income from mortgage
guaranty policies sold on new loans provides a secure source
of income, and thus improves the financial condition of the
insurer.
4)Current 25-1 risk to surplus ratio . California adopted the
fixed ratio for all mortgage guaranty insurers in 1982, and
apparently selected the middle ground from studies in the
early 1960's that suggested that a healthy risk to capital
ratio for this industry ranged from 12.5-1 to 40-1.
(Technically, California's statute is more complex than simply
adopting a 25-1 risk to capital ratio; however, functionally,
the formula approximates this ratio, which most other states
have adopted as is.) Other than these early 1960's studies,
there really isn't any hard evidence that a 25-1 ratio is a
necessary feature of a sound regulatory law. Even relying on
those studies, an Insurance Commissioner could prudently allow
a much higher ratio than currently allowed, and still be
within the parameters of the studies. The effect of the bill
would be to empower the Insurance Commissioner to make an
individual company determination based on the specific risks
and capital of a particular company - which seems a better
approach than a fixed number that could be too low for some
companies, but potentially too high for others.
5)Support . The Mortgage Insurance Companies of America (MICA)
makes several arguments in support of the bill. At the
general level, MICA points out that the regulation of the
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property/casualty and life industries has, in recent years,
tended to move away from inflexible statutory formulas. Tools
such as risk-based capital analysis, where the specific
insurance risks on a company's books are evaluated with
respect to its particular portfolio of investments, have
become the primary methods for evaluating a particular
company's financial health. In fact, last session the
Legislature repealed an outdated rigid rule applicable to
workers' compensation insurers that mandated a certain
percentage reserving requirement. That requirement
inappropriately tied up capital, and added nothing to the
overall ability of the Insurance Commissioner to regulate the
health of those companies. (See SB 316 (Yee) Statutes 2007,
Chapter 431.) Proponents liken this bill to SB 316 - a
measure to improve flexibility while maintaining the authority
of the Insurance Commissioner to regulate the industry.
MICA also argues that the portion of the bill that specifies
that fully reserved claims should not be part of the surplus
formula is consistent with similar laws in the states where
the mortgage guaranty insurers are domiciled. In this regard,
it is important to note that, while any state that licenses an
insurer has regulatory authority over that insurer, it is the
state of domicil that is the primary enforcer of financial
regulatory rules. In support of this argument, MICA has
provided the Committee with documentation from several of the
states where mortgage guaranty insurers are domiciled
establishing that the bill proposes a rule consistent with
those states.
REGISTERED SUPPORT / OPPOSITION :
Support
Mortgage Insurance Companies of America (sponsor)
California Building Industry Association
Opposition
None received.
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086