BILL ANALYSIS �
SB 1450
Page 1
Date of Hearing: June 20, 2012
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
SB 1450 (Calderon) - As Amended: April 12, 2012
SENATE VOTE : 35-0
SUBJECT : Mortgage Guaranty insurance: reinsurance
SUMMARY : Temporarily repeals a cap on the level of risk a
mortgage guaranty insurer may retain without reinsuring that
risk. Specifically, this bill :
1)Repeals, until January 1, 2018, a rule that limits the amount
of risk a mortgage guaranty insurer may retain, without
reinsuring that risk, to 30% of the value of the first lien
mortgage loans on its books.
2)Provides that current law is readopted on January 1, 2018.
EXISTING LAW :
1)Establishes a specific regulatory structure for mortgage
guaranty insurance, which is generally insurance that
guarantees payment to a lender in the event of a default by an
insured borrower.
2)Establishes unique financial regulatory rules for this class
of insurance because the insurer is a "mono-line" insurer,
that is, it does not write other types of insurance that leads
to risk spreading.
3)Limits the amount of risk a mortgage guaranty insurer can
assume for first liens at 30% of the value of those first
mortgages.
4)Allows the mortgage guaranty insurer to exceed this 30% cap if
it obtains reinsurance for risk above that level.
5)Allows this reinsurance to be provided by an affiliated
reinsurer.
FISCAL EFFECT : Unknown.
SB 1450
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COMMENTS :
1)Purpose . According to the author, existing law requires
mortgage guaranty insurers to acquire reinsurance that does
not improve the insurer's risk profile, is costly because the
mortgage guaranty insurer must capitalize an affiliated
reinsurer to meet this misguided requirement, and results in
unnecessary regulatory costs for both the Department of
Insurance (DOI) and the mortgage guaranty insurer. As a
result, suspending the rule that leads to this result makes
sense in today's real estate market.
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 the prospect of not
continuing to write this insurance for borrowers (often
first-time borrowers who could not afford the home without an
insured loan), or 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 foreclosure crisis, which has led them to pay lenders
after loan defaults at relatively high historical levels,
mortgage guaranty insurers are playing a major role in
maintaining a weak real estate market.
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.
With many mortgage guaranty insurers operating near or above
the cap, the current cost of this insurance is higher than
need be, with no discernible benefit.
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3)DOI position . According to the DOI, "the 30 percent cap may
not be appropriate in today's housing market and lending
market." However, since it is not clear to DOI that these
market conditions will continue into the future, it suggested
to the mortgage guaranty insurance industry that the repeal of
the cap should sunset in 5 years. This bill represents an
agreement between the regulator and industry on a sound way to
assist in promoting a key piece of today's weak real estate
market.
REGISTERED SUPPORT / OPPOSITION :
Support
Mortgage Insurance Companies Association
Opposition
None received.
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086