At the end of 2012, the National Association of Insurance Commissioners (“NAIC”) created the Mortgage Guaranty Insurance (E) Working Group (the “MGIWG”). The MGIWG was created to consider what changes might be necessary, if any, to the solvency regulation of mortgage guaranty insurers in the United States and to make recommendations for any such proposed changes to the NAIC’s Financial Condition (E) Committee including possible changes to the NAIC’s Mortgage Guaranty Insurance Model Act (the “MGI Model Act”).
On February 19, 2013, the MGIWG exposed for comment a draft document called “Concepts - List of Potential Regulatory Changes” (available here), which set forth the problems that the MGIWG has identified in the current regulation of mortgage guaranty insurance that might warrant changes to the MGI Model Act. In the draft, the MGIWG listed three problems that it believes have to be addressed: 1) the overconcentration of mortgage origination in a small number of banks places competitive pressure on insurers to either take all the business from a given bank or receive no business from that bank; 2) mortgage guaranty insurance is used as a form of “economic catastrophe insurance”, which is thought to lead to a distortion of corporate income taxes and stockholder dividends for companies in this line of business; 3) profitability of mortgage guaranty insurance during long periods of great profitability is thought to create a disincentive to underwrite the business attentively.
In response to these issues, the MGIWG’s draft document proposes several potential regulatory changes, including:
- Requiring minimum underwriting standards;
- Considering changes to minimum capital requirements;
- Updating and modifying contingency reserve requirements;
- Abolishing reinsurance requirements to concentrate resources and cut unnecessary overhead expenses;
- Prohibiting captive reinsurance arrangements with originating banks; • Limiting dividends to force insurers to retain capital in long profitable time periods for availability during periods of severe losses;
- Creating a mutual reinsurance company that all insurers would be required to use to house additional reserves for bad times;
- Creating some FDIC-like government entity as a backstop where premiums are paid in over an entire business cycle;
- Establishing new reporting requirements that break out the types of risk/ exposures and are used to help determine/assess leverage and potentially used for capital requirements;
- Re-establishing the Home Owners’ Loan Corporation to facilitate greater uniformity in the workout process for borrowers that meet criteria indicating that they are viable prospects for retaining home ownership; • Modifying investment limitations; and
- Establishing rights and responsibilities for mortgage guaranty insurers concerning rescissions of insurance policies and certificates.
On February 28, 2013, the MGIWG held a conference call to discuss problems with and potential recommendations regarding the current situation of mortgage guaranty insurance. The discussion points from that conference call and comments to the draft exposed by MGIWG, which were due by March 29, 2013, will be considered further at the NAIC Spring National Meeting in Houston, Texas on April 5, 2013.