After much anticipation from the mortgage insurance industry, Fannie Mae and Freddie Mac released their updated requirements that private MIs must meet to be eligible to provide mortgage insurance on GSE loans. This is the first time the requirements have been revised since being introduced in 2015.
Dubbed PMIERs 2.0, the new private mortgage insurance eligibility requirements will go into effect in March 2019.
They serve as a way for Fannie and Freddie to better manage counterparty risks by detailing financial and operational eligibility requirements that private mortgage insurers need to meet, especially as PMIs play a large role in high loan-to-value lending.
The revised financial requirements include changes to the risk-based asset requirements.
The GSEs added a new multiplier for non-performing loans backed by a property in a Federal Emergency Management Agency-declared major disaster area and eliminated the legacy premium credit.
The new requirements also provide enhancement to the treatment of approved risk-transfer transactions and make adjustments to risk-transfer credit arising from counterparty risk associated with reinsurance transactions. They revise the insurance collateral framework and introduced counterparty haircuts.
Bose George, an analyst with Keefe, Bruyette and Woods, said the main change was the removal of credit for some future premiums on legacy policies on loans acquired before 2009. But he said this only impacts the companies that wrote business at that time.
“On a positive note, the tables and adjustment factors/multiples used to calculate minimum required assets remain mostly unchanged from the original PMIERs, with a couple of minor exceptions,” he said, adding this was largely in line with expectations.
Bose expects a positive reaction from MIs as the release of the new framework removes an overhang on the sector, and the impact on the legacy MIs will fade over time as the legacy books run off.
Mortgage insurers said they are prepared to meet the new requirements. Radian said it is “well positioned” to maintain compliance with PMIERs 2.0 and is positioned to maintain substantially the same excess of available assets over minimum required assets under PMIERs 2.0 as it had on June 30, 2018, under the current PMIERs, without a need to take further actions to do so.
The company said it based expectations on its forecasted new insurance written, its projections for ongoing positive operating results, its strong capital position and the benefits of its reinsurance programs.
MGIC said if PMIERs 2.0 had been effective as of June 30, 2018, its pro forma excess of available assets over minimum required assets would have been approximately $600 million, compared to its reported excess of approximately $1.0 billion as of June 30, 2018.
The MI attributes that difference to the elimination of any credit for future premiums that had previously been allowed for certain insurance policies.
Although MGIC’s excess minimum required assets will decrease when PMIERs 2.0 becomes effective, MGIC does not expect PMIERs 2.0 to impact its current plans to pay quarterly dividends to its holding company.
“I am pleased that the revised eligibility requirements have been finalized so we can now turn our full attention to providing increased access to credit for consumers and reducing GSE credit risk while generating good returns for shareholders,” said Patrick Sinks, CEO of MGIC.
NMI Holdings also said it expects to remain in full compliance.
As of June 30, 2018, National MI had total available assets of $653.1 million, compared to risk-based required assets of $587.2 million, with $65.9 million of excess funding capacity.
Under the revised PMIERs framework, the company estimates that its total available assets would have been $681.3 million, and its risk-based required assets would have been $593.6 million as of June 30, 2018, with pro forma excess funding capacity of $87.7 million.
In July 2018, National MI obtained $264.5 million of excess-of-loss reinsurance coverage through an insurance-linked notes offering. Due to the reinsurance coverage and the revised PMIERs framework, National MI estimates that its pro forma excess available assets would have been $352.2 million.
FHFA Director Mel Watt noted that the updated requirements incorporated feedback from the mortgage insurance industry.
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