Various legislative proposals to abolish the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, the housing finance giants commonly known as Fannie Mae and Freddie Mac, could establish new Federal presence in the oversight of private mortgage insurance ("MI"). Although they preserve state regulation over MI carriers generally, some of these proposed measures would require MI carriers to meet Federal standards in order for the mortgages they insure to secure residential mortgage-backed securities ("MBS") carrying a Federal guarantee, as described below. (MI carriers have historically been required to satisfy Fannie Mae and Freddie Mac-imposed eligibility standards in order to write coverage on mortgages aggregated by these so-called GSEs ("government-sponsored enterprises"), but, generally, these have not been directly imposed or enforced by a Federal agency.) These proposals underscore the importance of MI in Federal housing policy and are aligned with the Federal Insurance Office’s (“FIO”) recent statements advocating a larger Federal role in MI.1
U.S. lawmakers have struggled to find a solution for Fannie Mae and Freddie Mac, which have been under government conservatorship since their near meltdown in 2008 threatened the stability of the housing market. In June 2013, Senators Bob Corker (R-Tenn.) and Mark Warner (D-Va.) introduced the Housing Finance Reform and Taxpayer Protection Act of 2013, which would wind down Fannie Mae and Freddie Mac over five years, replacing them with a new government agency, the Federal Mortgage Insurance Corporation ("FMIC"). FMIC would be responsible for overseeing mortgage lending activities and provide guarantees to holders of certain MBS in the event of an economic crisis. In order for MBS to be eligible for such guarantee, the terms of the security, generally, must provide that holders are exposed to the first layer of loss in any event. Under this bill, the Federal government would provide investors a full-faith-and-credit guarantee on such MBS and, in turn, FMIC would be required to develop and publish standards for the approval of private MI carriers to provide MI on eligible mortgages securing such MBS. Such standards would be required to include:
- the financial history and condition of the insurer;
- the adequacy of its capital structure, including whether the insurer has sufficient capital to cover the "first loss insurance obligations [that] it assumes" under Corker-Warner "and that might be incurred in a period of economic stress, including, but not limited to, any period of economic stress that would result in a 30 percent (or greater) national home price decline;"
- the general character and fitness of the management of the insurer, including compliance history with Federal and state laws;
- the risk presented by such insurer to the Mortgage Insurance Fund (a fund established under Corker-Warner, which is to be financed by issuers of private mortgage securities and available in the event of financial catastrophe);
- the adequacy of insurance and fidelity coverage of the insurer;
- a requirement that the insurer submit audited financial statements to the FMIC Director; and
- any other standard the FMIC determines necessary or appropriate.
Last month, Senators Tim Johnson (D-S.D.) and Mike Crapo (R-Id.) made public a "discussion draft" of the Housing Finance Reform and Taxpayer Protection Act of 2014, which, while largely paralleling the Corker-Warner bill, has important differences. Among these are the provisions outlining the standards for approving private MI carriers. Under Johnson-Crapo, these include the ones listed above from Corker-Warner, except that in place of the italicized item above, Johnson-Crapo lists
- the adequacy of capital structure, including whether the insurer has sufficient capital "to protect its policyholders from loss;"
- the establishment and maintenance of "adequate loss reserves" for the "estimated total liability for claims;" and
- that the private MI carrier has "the capacity to insure eligible single-family mortgage loans in a manner that furthers the purposes" of the FMIC.
Johnson-Crapo goes on to provide that "nothing in [these requirements] shall be construed to prevent the [FMIC] from approving a small or specialty private mortgage insurer, provided that the private mortgage insurer has the capacity to adequately diversify its risk to meet appropriate safety and soundness concerns." In addition, "to promote consistency and minimize regulatory conflict," the FMIC is required to "consult and coordinate with appropriate Federal and State regulators" when developing approval standards for MI providers.
Unlike Corker-Warner, the Johnson-Crapo discussion draft also makes explicit that it does not intend to depart from the historic state-centered approach to insurance regulation, stating that "the appropriate State insurance regulator of an approved private mortgage insurer has primary authority to examine and supervise the approved private mortgage insurer." Two separate housing finance reform proposals have been proposed in the House of Representatives as well. A Republican-led version, introduced by Representatives Jeb Hensarling (R-Tex.), Scott Garrett (R-N.J.), Randy Neugebauer (R-Tex), and Shelley Moore Capito (R-W.V.) in July 2013, would similarly wind down Fannie Mae and Freddie Mac but would not provide such a governmental guarantee on MBS. The bill makes no explicit reference to private mortgage insurers given that the ultimate function of the approval process contained in the Senate versions (the imposition of standards on credit enhancement for the collateral supporting Federally guaranteed MBS) is absent in this legislation.
On March 27, 2014, Representative Maxine Waters (D-Calif.) put forward draft legislation that, while gradually shutting down Fannie Mae and Freddie Mac, would replace such entities with a cooperative of lenders that would be the sole issuer of government-guaranteed mortgage-backed securities. Rep. Waters' legislation mirrors Corker-Warner in granting a federal agency the authority to develop standards for the approval of private MI carriers to provide MI on eligible mortgages securing a Federally guaranteed MBS, including whether the insurer has sufficient capital to cover the "first loss insurance obligations it assumes" under the bill. The categories of standards required to be applied under the Waters bill is substantially identical to those in Corker-Warner.