The proposed risk-retention rule within the Dodd-Frank Act, which would require creditors to hold a 5% stake in loans that are securitized, could seriously impede mortgage insurers ability to rebuild their capital with new business, according to Standard & Poor’s. Analysts said the rule would exempt loans that are classified as qualified residential mortgages and loans guaranteed by the Fannie Mae, Freddie Mac, the Federal Housing Administration and the Veterans Administration. “QRMs are defined narrowly. They require a minimum 20% down payment, which would cut into private mortgage insurers’ business,” Standard & Poor’s credit analyst Ron Joas said. “In addition, as the QRM definition is currently written, mortgage insurance is not included as a credit enhancement. Absent the GSE exemption, this would significantly limit the loans on which MIs could write mortgage insurance.” At the same time, Joas says the GSE exemption offers one avenue for mortgage insurers to write new business, but that alternative could end with the fate of GSEs remaining uncertain. “Assuming the GSEs would be put into runoff as under the Treasury proposal, the GSE exemption would become increasingly less meaningful regardless of the level of the required down payment,” Joas said. “This could greatly diminish the market size for private mortgage insurance, hurting MIs’ business profiles and competitive positions.” S&P did see one silver lining in the QRM proposal. It “would likely improve the credit quality of the mortgage insurers’ insured portfolios over the longer term,” Joas said. Write to Kerri Panchuk.
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