NEW YORK (TheStreet) -- Private mortgage insurers, which underwrite loans for homebuyers who can't afford a 20% down payment, stand to benefit from looser capital requirements that give them the cash to expand just as the largest insurer, the federal government, faces pressure to pull back.
The criteria for companies such as Mortgage Guaranty Insurance (MTG) and Radian (RDN) to obtain "approved insurer" status -- which lets them insure loans bought or held by big government-backed lenders like Fannie Mae (FNMA) -- were spelled out in an update of the Private Mortgage Insurer Eligibility Requirements that relaxed standards proposed in July. The requirements have been under review for years by lenders and government officials seeking to prevent a repeat of the 2008 financial crisis while keeping credit available for buyers.
The changes, effective Dec. 31 for existing insurers and immediately for new applicants, boost investor confidence by eliminating uncertainty about how exacting new criteria would be. They also free up cash for the mortgage insurers, which control 15% of the market in the U.S., to expand their customer base. By far the largest insurer is the U.S. government, which has insured more than 34 million properties through the Federal Housing Administration since 1934.
"It's now time to accelerate the discussions regarding proposals that would allow private mortgage insurers to further reduce [risk]" -- the risk of unpaid mortgages shouldered by Fannie Mae, Freddie Mac (FMCC) and, ultimately, taxpayers -- said Mortgage Guaranty CEO Patrick Sinks to investors on a conference call Tuesday. Such proposals include replacing government insurance on loans with down payments above the 20% level, and deepening coverage on loans requiring smaller down payments.