Magazine article American Banker

Battle Lines Drawn over Capital Rule

Magazine article American Banker

Battle Lines Drawn over Capital Rule

Article excerpt

The unease the economy is causing the mortgage insurance industry is being aggravated by the capital rule approved by the Office of Management and Budget in July for Fannie Mae and Freddie Mac.

By requiring Fannie and Freddie to hold more capital when doing business with AA-rated mortgage insurance companies than with AAA-rated ones, the rule, written by the Office of Federal Housing Enterprise Oversight, gives the two AAA-rated insurers -- United Guaranty Corp. and GE Mortgage Insurance Corp. -- what some call a competitive advantage.

Several of the AA-rated companies have privately urged OFHEO to alter the rule and level the playing field -- a change OFHEO has indicated it is willing to consider.

The five AA-rated companies are Radian Guaranty, a unit of Radian Group Inc.; MGIC Mortgage Insurance, a unit of MGIC Investment Corp.; Triad Guaranty Inc.; Republic Mortgage Insurance Co., a unit of Old Republic International Corp.; and PMI Group Inc.

Turning up the heat, the heads of GE Capital Corp. (of which GE Mortgage is a subsidiary) and American International Group Inc., the parent of United Guaranty, sent letters late last month to Mel Martinez, the Secretary of the Department of Housing and Urban Development, in which they urged him not to make any changes.

In spirited language, the two CEOs urged Mr. Martinez, HUD, and in turn OFHEO not to succumb to political pressure, and they warned of dire economic consequences if the capital rule is changed.

"With the U.S. economy seriously weakening in the last 12 months and facing an uncertain immediate future, this is the worst possible time to dilute regulations that protect GSE safety and soundness," wrote Maurice R. Greenberg, AIG's chairman and chief executive officer.

Yet Glenn Corso, a spokesman for PMI Group, argues that because all mortgage insurers are required to hold 50 cents of every dollar in premium in reserve for 10 years, there is no reason two companies should be rated higher than the others. …

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