LONDON Global regulators have toughened up standards for insuring home loans after defaults in U.S. mortgages sparked a global financial crisis and an industry shakeout six years on.
Some insurers have filed lawsuits against banks, accusing them of falsely representing the quality of loans they were asked to insure.
Many of the loans were subprime and began defaulting in 2007, triggering a chain of events that led to a global markets meltdown.
The new rules have been compiled by the Joint Forum, a group of regulators and central bankers after a request from the G20 group of top economies.
"Mortgage origination and mortgage insurance were at the very core of the financial crisis," said Thomas Schmitz-Lippert, the group's chairman.
The rules say regulators should require mortgage insurers to build long-term capital buffers and reserves to cover claims properly. Mortgage insurers and the banks whose mortgages they insure should also maintain strong underwriting standards.
The crisis hit insurers particularly hard in the United States where many subprime home loans were made.
Two U.S. insurers, PMI Mortgage Insurance and Republic Mortgage Insurance, were placed under state supervision due to mounting losses and the resultant capital shortfalls. Three others still have sub-investment grade credit ratings, the joint forum said.
U.S. contingency reserves were nearly exhausted over the past five years, plummeting to just $615,000 by the end of 2011 compared with $13.4 billion in 2007 when the crisis began.
"Credit rating agencies believe that new (U.S.) business writings will not be sufficient to offset expected losses into 2013," the joint forum said.
But the new rules shy away from taking a stance on monoline insurance structures which are compulsory in the United States, Australia, Canada and Hong Kong. A monoline structure means they cannot insure other products to help diversify their risks.
Credit rating agency Standard & Poor's said in October 2012 that new mortgage business looks highly profitable but many insurers face the harsh reality that mistakes they made before the financial crisis may yet lead to their demise.
Despite a recovery in the U.S. housing market an industry shakeout is already underway with reinsurer Arch Capital Group (ACGL.O) announcing in February it will take over CMG Mortgage Insurance Co and the operating platform of PMI Insurance.
(Reporting by Huw Jones; Editing by Louise Heavens)