On July 10th, the Federal Housing Finance Agency (FHFA), which regulates and supervises the USA’s housing GSEs, Fannie Mae and Freddie Mac, published a paper entitled “Draft Private Mortgage Insurer Eligibility Requirements” (PMIERs, or “P-Myers” for the aficionado) as a consultation document setting out its proposals for new guidelines that any entity that wishes to provide mortgage insurance to the GSEs will have to meet.
To say that the publications provoked an industry reaction would be an understatement: share prices of a number of PMIs fell; several announced that they believed that they would already be compliant with the PMIERs; and others that they would have to take material steps to become compliant over what they expected to be a two-year phase-in period once the guidelines were finalized. From what we have read, it seems clear that the PMIs were aware of what the FHFA intended and made representations to it; but also that the FHFA did not accept at least some of what the PMIs sought.
So, what provoked such a reaction?
The key component of the paper is a new requirement that all PMIs who wish to be accepted by the GSEs as eligible to provide mortgage insurance must maintain a minimum level of 5.6% of Eligible Assets (a fairly narrowly defined term) as a percentage of their Risk In Force (RIF), using tables and criteria set out in the paper, which in turn were sourced from the GSEs’ own analytics via the FHFA’s Mortgage Analytics Platform. The rub is that even if a portfolio calculation produces an outcome below 5.6% (and some of the weightings go down to 1%), 5.6% is the minimum requirement. Another factor to consider for those PMIs with significant legacy books is that some of the portfolio weightings can reach over 100%.
Thus, PMIs are going to have to assess their legacy, current and future business for what the required level of Eligible Assets will be; which will also indirectly drive how much regulatory capital they need and thus have an impact on returns and pricing.
One of the mitigants that many of the PMIs will be considering is reinsurance; which, as long as it is risk-bearing, is permitted under the draft PMIERs. At Awbury, in our quest to continue to provide innovative products to our clients, we have developed ways in which, with our (re)insurance partners, we can assist the PMIs in dealing with the potential consequences of the FHFA’s goals; and believe that our approach will be both effective and cost and capital efficient.
As the US PMI market adjusts, adapts and grows, we stand ready to help our clients, as in other areas, to continue to achieve their goals.
-The Awbury Team