BANGALORE U.S. mortgage insurers may suffer collateral damage if a new rule aimed at cleaning up the multi-trillion dollar mortgage lending industry comes into effect.
Under the proposed qualified residential mortgage (QRM) rule, if banks seek to bundle the loans into securities they would need home buyers to make a 20 percent down-payment, or 'keep skin in the game' by having 5 percent of the loan on their books.
Mortgage insurers Genworth (GNW.N), MGIC (MTG.N), Radian (RDN.N) and PMI PMI.N -- which generally see more business from low down-payment loans -- oppose the plan, saying it will further eat into their already shrinking business.
They argue the QRM proposal is "too narrow" to improve loan growth and are pitching for a home buyer down-payment of as low as 5 percent.
Mortgage Insurance Companies of America (MICA) -- whose members include PMI Group and Radian -- also wants QRM to include individuals with a debt-to-income ratio of up to 45 percent.
"Stringent rules for the banking industry actually mean mortgage insurers can write less business, which means a dent in profits," Standard & Poor's analyst Ron Joas said.
Given that mortgage insurers are already under the cosh from legacy delinquencies and claims -- a hangover from the credit crisis -- the outlook appears bleak.
With the Mortgage Bankers Association forecasting loan originations declining by well over a third to $1 trillion this year and to $960 billion in 2012, mortgage insurers will find it tough to combat a weak loan origination market and the legislative juggernaut at the same time.
In the short-term, however, the QRM rules will have limited impact on mortgage insurers as new loans, backed by government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, are already exempt from the risk-retention rules.
Currently, Fannie and Freddie back nine of every 10 new mortgages in the United States.
But, with the two mortgage giants being wound down, mortgage insurers will no longer have the safety net they have enjoyed for years.
"It's only after they (GSEs) exit conservatorship, which will happen once financial reform takes place, that QRM rules would start leaving a mark," said Compass Point analyst Chris Gamaitoni.
The U.S. Federal Reserve took over Fannie and Freddie and put them under government control almost 3 years ago when the housing market collapsed and Lehman went bankrupt.
First, though, the Federal Reserve and the Federal Deposit Insurance Corporation will have to take a call on the QRM rules even as the administration and Congress consider ways to restructure the two GSEs.
"We're seeing two different legislations - the QRM rules and the winding down of the GSEs. I don't see the impact on mortgage insurers until the 2012 (presidential) elections," said S&P's Jaos.
IMPROVING CREDIT QUALITY
On the flipside, while mortgage insurers will underwrite lower volumes of business, they will be dealing with a safer portfolio of mortgages.
"It translates into less business, but, in this case, less may be more, as you will have a more profitable business," Citi analyst Colin Devine said.
As a safety check, QRM states that loans can be given only to borrowers who have never had a 60-day delinquency in their credit history.
"The strict QRM definition is likely to dampen lenders' attempts at reintroducing the types of riskier loan products that were largely responsible for the burst of the housing market bubble," said Joas at S&P.
(Reporting by Rachel Chitra & Brenton Cordeiro in Bangalore, Editing by Anil D'Silva and Ian Geoghegan)