BILL ANALYSIS �
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|SENATE RULES COMMITTEE | SB 1450|
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CONSENT
Bill No: SB 1450
Author: Calderon (D)
Amended: 4/12/12
Vote: 21
SENATE INSURANCE COMMITTEE : 8-0, 4/25/12
AYES: Calderon, Gaines, Anderson, Corbett, Correa, Lieu,
Lowenthal, Wyland
NO VOTE RECORDED: Price
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
SUBJECT : Mortgage guaranty insurance
SOURCE : Mortgage Insurance Companies Association
DIGEST : This bill, until January 1, 2018, eliminates
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 four
families.
ANALYSIS : Existing law:
1. Requires a mortgage guaranty insurer to limit its
CONTINUED
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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 four
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, until January 1, 2018, deletes those
requirements with regard to that class of insurance.
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.
Existing 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: (1) pay the
lender the agreed portion of the loss capped at 30%; or (2)
pay the entire outstanding loan balance and take title to
the property.
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Reinsurance . Mortgage guaranty insurers may exceed the
limit by shifting some of that risk to other insurers
("reinsurers").
History of the Cap . The limit was originally set at 20%.
(Chapter 719, Statutes of 1961) 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.
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 25%. (Chapter 763,
Statutes of 1974)
In the 1980s, regulators and lawmakers adopted rules that
allow mortgage guaranty insurers to form affiliates that
provide reinsurance back to the parent company. Existing
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 30%. 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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 4/30/12)
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Mortgage Insurance Companies Association (source)
ARGUMENTS IN SUPPORT : Mortgage Insurance Companies
Association (MICA) supports this bill because it eliminates
unnecessary and burdensome restrictions on retained risk
and reinsurance. This bill allows mortgage guaranty
insurers to have more capital available for paying claims
instead of paying for administrative overhead that serves
no discernible purpose.
MICA states that this bill also makes California law
consistent with 42 of the 51 jurisdictions in the United
States (including the District of Columbia).
Additionally, MICA argues consolidating the underwriting
and finances of a mortgage guaranty insurer into a single
entity will make it easier for regulators to understand the
insurance and financial dynamics of the insurer.
JJA:kc 4/30/12 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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