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Mortgage insurers are not a panacea to stable housing finance reform

Insurance regulator says insurers can help, but underwriting remains key

Mortgage insurers experienced a period of great volatility after the 2008 housing bust, and those that survived hope to find a place in the future secondary mortgage market once the government-sponsored enterprises are fully reformed.

Testifying in front of the Senate Banking Committee, the general counsel for the Federal Housing Finance Agency indicated that the conservator of the GSEs is supportive of legislation to set up the future secondary mortgage market – adding back in a dose of private capital.

One of the proposed tools is legislation that would create a new supervisory agency, known as the Federal Mortgage Insurance Corp., which would set standards to keep the mortgage market going, provide access to credit and the secondary mortgage market and oversee the insurance of securities.

While most panelists testifying in front of Congress supported some type of reform, one insurance regulator told lawmakers they should avoid viewing insurers and bond guarantors as a panacea to fixing the mortgage finance market or as the new holder of all the risk once private capital moves back in.

Kurt Regner, assistant director of the Arizona Department of Insurance and a representative for the National Association of Insurance Commissioners, warned the committee that mortgage insurers learned the hard way that insurance coverage – even with premiums coming in to balance risk – is not enough to stave off risks stemming from chronically bad underwriting.

"We recognize that there are many who would like a more prominent role for the private market in housing finance markets and less reliance on the GSEs, and insurance regulators remain committed to helping Congress shape such proposals," Regner said.

But he warned, don’t consider these a "magic bullet" that can fix housing and take on all the risk without consideration for safety. He added, "neither PMI nor financial guaranty insurance should be seen as a substitute for due diligence or sound underwriting by mortgage servicers or bond issuers."

Regner’s major concern reflected NAIC’s belief that GSE reform proposals — which pine for the creation of a new federal regulator to develop standards for the approval of insurers — will end up overstepping state regulators who are already cognizant of keeping these markets stable.

Regner asked the committee for some deference to state regulators that are already overseeing capital and reserve requirements.

"The incentive is simply too great for a regulator charged with maintaining the viability of a government guarantee to overshoot this regulatory objective and put in place standards, particularly solvency standards such as capital requirements, that are more stringent than necessary," he explained. He added that this would in fact hurt access to coverage and undermine the objective of using private-market solutions.

In other words, any future federal regulator overseeing the new secondary market should be required to defer to state insurance regulators when an issue is already in their coverage area and deals with the risk positions these firms are going to take on.

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