With U.S. banking regulators issuing a revised capital requirements framework in March of this year, Basel III Endgame has again been a hot topic that has far-reaching impacts for the mortgage industry.
Recently, I had the opportunity to submit a comment letter to federal banking regulators on behalf of MGIC to address the role of private mortgage insurance in mitigating mortgage credit-loss risk. Our message is clear: Mortgage insurance is a powerful financial tool that helps Americans accelerate pathways to homeownership, and it should receive recognition within the bank capital framework.
More explicitly, our letter recommends that the federal banking regulators:
- Expand the recognition of the loss-mitigating benefit of MI in the proposed LTV-based risk weights and apply a haircut more aligned with historical claims-paying performance for monoline MI companies
- Ensure a viable pathway for monoline MI companies to become eligible guarantors and qualify for the “corporate” 65% risk weight under the substitution framework – a change that would enhance the ability of banks to participate in credit risk transfer (CRT) with qualified counterparties already facilitating the GSEs’ CRT programs
We’re in a unique position to comment on the value of MI to banks and to the mortgage ecosystem. As the founder of the modern private mortgage insurance industry, with experience earned through our nearly 70-year history, we’ve continued operating and paying claims throughout 10 recessions and the banking reforms that followed them. During the 2008 financial crisis that directly led to Basel III banking regulation reform, MGIC paid 100% of approved claims without a single dollar of federal support.
Much of our comment letter focused on illustrating the strength of the monoline MI business model to support our recommendations. Here are some highlights:
- Based on the claims-paying history of the monoline MI industry, the Banking Agencies should be fully confident that the industry is a sound, resilient and tested counterparty
- The diversified and countercyclical capital structure of the monoline MI model distinguishes it from virtually all other financial intermediaries, and it is the structural foundation of the industry’s demonstrated resilience
- The monoline MI industry emerged from the post-crisis reform period significantly strengthened, operating under more stringent capital requirements imposed by the GSEs and bound by a uniform master policy. The Banking Agencies should evaluate today’s MI industry through the post-reform lens, not the pre-reform one
Our comment letter is also aligned with recommendations from USMI, the private MI industry’s trade association. Basel III is an important moment for our industry – it’s incumbent on us to advocate for recognition of the benefits of private MI, not only for the benefit of banks but also for consumers who will benefit from greater access to low-down-payment financing options. As the nation’s first, oldest, and largest modern-day private mortgage insurer, MGIC brings a singular perspective based on experience and data to support our recommendations.
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