A new law signed Monday by California Governor Arnold Schwarzenegger -- SB 291 -- will give regulatory relief to mortgage insurers and greater discretion to regulators in the state. Existing laws require a mortgage guaranty insurer to cease new business if it cannot maintain the required amount of policyholders surplus. The new law excludes the outstanding principal balance of any loan in default for which the insurer has established a loss reserve. The new law, which takes effect Jan. 1, 2010, gives regulators other discretions to permit mortgage insurers to continue with new business despite capital shortfalls below required levels. This should provide insurance regulators greater flexibility to assess the strength of mortgage guaranty insurers, as well as support housing recovery in California, according to a statement from PMI Mortgage Insurance Co. “A guiding principal of the mortgage insurance industry is supporting sustainable homeownership and the ability to write new business is a critical factor in the recovery of the US housing market,” PMI Group (PMI) chairman and CEO Steve Smith said in September regarding a similar law in Arizona. Write to Diana Golobay.