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MGIC Comments on Draft GSE Mortgage Insurer Eligibility Requirements

Jul 10, 2014

MILWAUKEE, July 10, 2014 /PRNewswire/ -- Today the Federal Housing Finance Agency (FHFA) released for public input draft private mortgage insurer eligibility requirements (Draft PMIERs) that Fannie Mae a nd Freddie Mac (GSEs) would use to approve private mortgage insurers that provide mortgage insurance on loans owned or guaranteed by the GSEs.

The Draft PMIERs require that an insurer have "Available Assets" (generally, only the most liquid assets of an insurer) equal to or greater than "Minimum Required Assets" (which are calculated from tables of factors with several risk dimensions and are subject to a floor amount). The stated goal of these financial requirements is to "ensure that Approved Insurers have adequate liquidity and claims-paying capacity during periods of economic stress." However, in our view, the Draft PMIERs would require insurers to maintain liquid assets far in excess of the amount required to achieve that goal.  If the Draft PMIERs were adopted in the form released for public input, our preliminary assessment is that MGIC's Available Assets would be materially less than its Minimum Required Assets, as discussed below.

We believe the Draft PMIERs require mortgage insurers to hold unnecessarily excessive assets with potential adverse effects on creditworthy borrowers and housing policy

We believe the two primary drivers causing the amount of Minimum Required Assets to be unnecessarily excessive in light of the stated goal are:

  • future contractual premiums on all policies that are in force are not part of Available Assets; and
  • the required asset factors for new business are established to withstand a stress loss scenario at the time the insurance is written, meaning the factors already anticipate that there will be delinquent loans. However, as loans become delinquent, the Draft PMIERs require additional assets to be held for these loans. In addition, the factors do not decline for non-delinquent loans as a book of business seasons.

We have worked hard to incorporate into our business model "lessons learned" from the financial crisis.  Hence, we embrace robust risk adjusted capital requirements and support the goal of modernizing the GSEs' mortgage insurance eligibility requirements.  However, modernization should result in a system that reduces taxpayer risk and provides incentives for private capital to play a larger role in ensuring that creditworthy borrowers have access to mortgage credit at a reasonable cost. We do not believe that the Draft PMIERs will achieve these results.

If the Draft PMIERs were implemented in the form released for public input, we believe they would:

  • restrict access to credit and/or increase the cost of homeownership for creditworthy borrowers;
  • increase taxpayer risk as private mortgage insurance loses market share to less‑regulated, or non-regulated, credit enhancements or to FHA insurance; and
  • discourage private capital from investing in housing finance due to the mismatch between risk and return on the capital that would be required.

The FHFA has requested public input on the Draft PMIERs by September 8, 2014.  MGIC will be submitting a detailed comment letter because it believes there are significant shortcomings in the Draft PMIERs.

The Draft PMIERs would be effective 180 days after their publication in final form (the effective date); however, insurers would have up to two years after the effective date to meet the financial requirements (the transition period).  During the transition period, an insurer who fails to meet the financial requirements would be subject to a transition plan having milestones for actions to achieve compliance. The transition plan would be submitted for the approval of each GSE within 90 days after the effective date, and if approved, the GSEs would monitor the insurer's progress. During the transition period for an insurer with an approved transition plan, an insurer would be in remediation (a status similar to the one under which MGIC has been operating with the GSEs for over five years) and eligible to provide mortgage insurance on loans owned or guaranteed by the GSEs.

Potential impact on MGIC if Draft PMIERs are implemented in the form released for public input

MGIC's preliminary assessment of the Draft PMIERs indicates that its Available Assets would be materially less than its Minimum Required Assets at both the projected effective date and two years thereafter. This assessment reflects the risk in force and capital of MGIC Indemnity Corporation, an MGIC subsidiary that wrote mortgage insurance last year (MIC) being repatriated to MGIC and assumes full credit is given for the existing external reinsurance arrangements (which we do not expect without changes to these arrangements, any such changes requiring the agreement of the reinsurers). As a result, despite MGIC's risk to capital ratio of 15.3:1 as of March 31, 2014, and a return to annual profitability that should result from declining losses on its legacy books and the high quality of its books written from 2009 forward, if the Draft PMIERs were implemented in the form released for public input, MGIC would have a material shortfall in its Available Assets at both of the measurement dates referred to above. 

If the Draft PMIERs were modified to consider expected future contractual premiums on all in force policies, MGIC's preliminary assessment indicates that it would have no shortfall in its Available Assets on either measurement date.  The Overview of the Draft PMIERs released by the FHFA expresses concern that because future premium is not part of an insurer's statutory capital including it in Available Assets exposes the GSEs to insolvency risk and also could incent an insurer to write uneconomic new business to generate future premium.  We believe these concerns are not valid for reasons we plan to detail in our comment letter.  Additionally, our preliminary assessment indicates the shortfall would be mitigated if the excessive level of Minimum Required Assets due to the delinquent loan and seasoning issues discussed above were modified.

If the Draft PMIERs were adopted in the form released for public input, MGIC could pursue various alternatives to mitigate the shortfall in its Available Assets, including, subject to any applicable limitations, contributing additional funds from the holding company to MGIC, modifying existing or entering into new external reinsurance transactions, raising additional capital to contribute to MGIC, and seeking approval from the GSEs to write all of our business in MIC (which we estimate has sufficient Available Assets to meet the financial requirements of the Draft PMIERs for approximately one year at current volumes of new insurance written, and assuming no changes to our existing external reinsurance arrangements, which also cover business written by MIC). However, there can be no assurance that these alternatives would enable us to meet the financial requirements within the transition period. Also, there can be no assurance that the financial requirements would not become more onerous in the future; in this regard, the Draft PMIERs provide that the tables of factors that determine Minimum Required Assets may be updated to reflect changes in risk characteristics and the macroeconomic environment.         

Throughout the financial crisis MGIC demonstrated its commitment to remaining an approved mortgage insurer with both Fannie Mae and Freddie Mac.  We look forward to working with the FHFA and the GSEs to incorporate the appropriate changes required to the Draft PMIERs to promote a liquid, affordable and stable housing market that reduces taxpayer risk and incents private capital to participate.

The description of the Draft PMIERs and the Overview in this press release is only a summary and is subject to and qualified by the text of the actual documents, which are available on the FHFA's website (www.fhfa.gov).

Forward Looking Statements

This press release contains forward looking statements. Among others, statements regarding the potential impact of the Draft PMIERs or alternatives that MGIC could pursue were the Draft PMIERs implemented in their current form, and statements that include words such as "believe," "anticipate," "will" or "expect," or words of similar import, are forward looking statements. We are not undertaking any obligation to update any forward looking statements or other statements we may make even though these statements may be affected by events or circumstances occurring after the forward looking statements or other statements were made. No investor should rely on the fact that such statements are current at any time other than the time at which this press release was issued. Our actual results could differ materially from recent results and those anticipated in these forward looking statements as a result of the following factors:

  • Our returns may decrease if we are required to maintain significantly more capital in order to maintain our GSE eligibility;
  • Competition or changes in our relationships with our customers could reduce our revenues or increase our losses;
  • Revised state capital requirements may prevent us from continuing to write new insurance on an uninterrupted basis;
  • The amount of insurance we write could be adversely affected if final rules defining "Qualified Residential Mortgage" result in a reduced number of low down payment loans available to be insured or if lenders and investors select alternatives to private mortgage insurance;
  • Changes in the business practices of the GSEs, federal legislation that changes their charters or a restructuring of the GSEs could reduce our revenues or increase our losses;
  • We may not have a successful outcome to the legal proceedings in which we are currently involved and we are subject to the risk of additional legal proceedings in the future;
  • Resolution of our dispute with the Internal Revenue Service could adversely affect us;
  • Because loss reserve estimates are subject to uncertainties and are based on assumptions that are currently very volatile, paid claims may be substantially different than our loss reserves; and
  • The mix of business we write affects the likelihood of losses occurring, assets required to be held for purposes of the GSE eligibility requirements and our premium yields.

For a more detailed description of the factors listed in the bullet points above (other than the first factor), you should refer to the Risk Factors detailed in our Quarterly Report on Form 10‑Q filed with the SEC on May 9, 2014.

About MGIC

MGIC (www.mgic.com), the principal subsidiary of MGIC Investment Corporation, is a private mortgage insurer with $159.7 billion primary insurance in force covering approximately one million mortgages as of March 31, 2014.  MGIC serves lenders throughout the United States, Puerto Rico, and other locations helping families achieve homeownership sooner by making affordable low-down-payment mortgages a reality.

From time to time MGIC Investment Corporation releases important information via postings on its corporate website without making any other disclosure and intends to continue to do so in the future. Investors and other interested parties are encouraged to enroll to receive automatic email alerts and Really Simple Syndication (RSS) feeds regarding new postings.  Enrollment information can be found at http://mtg.mgic.com under Investor Information.

SOURCE MGIC



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