LONDON Aug 20 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
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
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
announcing in February it will take over CMG Mortgage
Insurance Co and the operating platform of PMI Insurance.