BILL ANALYSIS �
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
SB 1450 (Calderon) Hearing Date: April 25, 2012
As Amended:April 12, 2012
Fiscal: No
Urgency: No
SUMMARY: Would, until January 1, 2018, eliminate requirements
that limit the percentage of coverage a mortgage guaranty
insurer may provide for the class of insurance that insures
against financial loss by reason of nonpayment of principal,
interest, and other sums under any evidence of indebtedness
secured by a mortgage, deed of trust, or other instrument
constituting a first lien or charge on a residential building or
a condominium unit or buildings designed for occupancy by not
more than 4 families
DIGEST
Existing law
1.Requires a mortgage guaranty insurer to limit its coverage,
for the class of insurance that insures against financial loss
by reason of nonpayment of principal, interest, and other sums
under any evidence of indebtedness secured by a mortgage, deed
of trust, or other instrument constituting a first lien or
charge on a residential building or a condominium unit or
buildings designed for occupancy by not more than 4 families,
to no more than a net of 30% at risk of the entire
indebtedness to the insured, or a mortgage guaranty insurer
may elect to pay the entire indebtedness to the insured and
acquire title to the authorized real estate security;
2.Authorizes a mortgage guaranty insurer to extend its coverage
for this class of insurance beyond the established limits
provided the excess is insured by a contract of reinsurance.
This bill
1.Would, until January 1, 2018, delete those requirements with
SB 1450 (Calderon), Page 2
regard to that class of insurance.
COMMENTS
1. Purpose of the bill. According to the sponsor, Mortgage
Insurance Companies Association (MICA), SB 1450 will permit
insurers to reduce costs, lift burdens from regulators, and
bring California on track with a majority of other states.
2. Background. Mortgage guaranty insurance protects lenders
from losses related to a variety of real estate security
interests including any note or bond secured by a mortgage,
deed of trust, or other instrument that constitutes a lien
on real estate. If the borrower fails to pay, the insurance
protects the lender. These risk-sharing agreements offer
stability to the financial market and encourage lending.
a. Current law: the 30% Cap. Insurance Code section
12640.09 prohibits a mortgage guaranty insurer from
directly insuring more than 30%
on an indebtedness or mortgage instrument
that is a first lien on residential real
property
designed for four families or less.
In case of a loss, the insurer may either: (i) pay the
lender the agreed portion of the loss capped at 30%; or
(ii) pay the entire outstanding loan balance and take
title to the property.
Reinsurance. Mortgage guaranty insurers may exceed the
limit by shifting some of that risk to other insurers
("reinsurers")
a. History of the Cap. The limit was originally set at
20%. (Statutes of 1961, Ch. 719.) According to the
sponsor, the limit was intended to distribute risk among
unaffiliated reinsurers, bring additional capital into the
mortgage industry, encourage underwriting discipline, and
provide market diversity and stability by recruiting
insurers that did not focus on real estate-related risk.
Mortgage guaranty insurers were also required to meet
certain requirements of surplus capital and premium
income.
SB 1450 (Calderon), Page 3
The sponsor explains that outside insurers did not respond
and the limit failed to bring in new reinsurers. Mortgage
guaranty insurers primarily purchased reinsurance from
other mortgage guaranty insurers or assumed their own
risk. In 1974, the limit was increased to twenty-five
percent. (Statutes of 1974, Ch. 763.)
In the 1980s, regulators and lawmakers adopted rules that
allow mortgage guaranty insurers to form affiliates that
provide reinsurance back to the parent company. Current
law requires that each affiliate must obtain its own
license and dedicate resources to maintain separate books
and comply with separate reporting requirements.
In 1996, the limit was increased to its present day level
of thirty percent. Additionally, the Insurance
Commissioner was given discretion to increase the limit to
as much as 35% in the event that Fannie Mae or Freddie Mac
increased insurance requirements for mortgage guaranty
insurers. According to the sponsor, reinsurers and
regulators dedicate significant financial and human
resources towards compliance with a complex system that
creates the illusion of reinsurance in form without the
real substance of risk spreading and diversification.
1. Summary of Arguments in Support
a. MICA supports this bill because it would eliminate
unnecessary and burdensome restrictions on retained risk
and reinsurance. SB 1450 would allow mortgage guaranty
insurers to have more capital available for paying claims
instead of paying for administrative overhead that serves
no discernible purpose.
b. MICA states that SB 1450 would also make California
law consistent with forty-two of the fifty-one
jurisdictions in the U.S. (including the District of
Columbia).
c. Additionally, MICA argues consolidating the
underwriting and finances of a mortgage guaranty insurer
into a single entity will make it easier for regulators to
SB 1450 (Calderon), Page 4
understand the insurance and financial dynamics of the
insurer.
1. Summary of Arguments in Opposition
None Received (as of April 22, 2012)
2. Prior and Related Legislation
a. AB 1539 and SB 1213 (enacted as Chapter 719,
Statutes of 1961) created a limit for the class of
insurance that insures against financial loss by reason
of nonpayment of principal, interest, and other sums
under any evidence of indebtedness secured by a mortgage,
deed of trust, or other instrument constituting a first
lien or charge on a residential building to no more than
a net of 20% of the outstanding balance of a loan.
b. AB 2498 (enacted as Chapter 736, Statutes of 1971)
authorized mortgage guaranty insurers to exceed the 20%
limit if the excess is reinsured.
c. SB 1990 (enacted as Chapter 763, Statutes of 1974)
increased the limit to 25% of the risk of the entire
indebtedness to the insured.
d. SB 1956 (enacted as Chapter 640, Statutes of 1980)
created minimum requirements for non-affiliated insurers
and reinsurers to qualify as mortgage guaranty insurers.
e. SB 882 (Robbins) (enacted as Chapter 772, Statutes
of 1990) revised the capital requirements of a
non-affiliated insurer or reinsurer and added new
requirements to those entities such as specified
reserves.
f. AB 1611 (Archie-Hudson) (enacted as Chapter 270,
Statutes of 1995) authorized mortgage guaranty insurers
to insure portfolios of loans secured by instruments
constituting junior liens on real estate, provided that
the total amount at risk in any one portfolio does not at
any time exceed 20% of the original principal amount of
mortgage loans secured by junior liens.
g. SB 1863 (Johnson) (enacted as Chapter 407, Statutes
SB 1450 (Calderon), Page 5
of 1996) increased the limit for the class of insurance
that insures against financial loss by reason of
nonpayment of principal, interest, and other sums under
any evidence of indebtedness secured by a mortgage, deed
of trust, or other instrument constituting a first lien
or charge on a residential building or a condominium unit
or buildings designed for occupancy by not more than 4
families, to no more than a net of 30% at risk of the
entire indebtedness to the insured.
h. SB 1216 (Lowenthal), 2011-12 Legislative Session,
would conform California law to National Association of
Insurance Commissioner's Credit for Reinsurance Model
Law.
POSITIONS
Support
Mortgage Insurance Companies Association (MICA)
Oppose
None Received (as of April 22, 2012)
Hugh Slayden, (916) 651-4773