BILL ANALYSIS
SB 1863
Page 1
Date of Hearing: June 18, 1996
ASSEMBLY COMMITTEE ON INSURANCE
David Knowles, Chairman
SB 1863 (Johnson) - As Amended: June 10, 1996
SENATE VOTE: 39-0
SUBJECT: Mortgage guarantee insurance
SUMMARY: Should mortgage guarantee insurers be allowed to insure
up to 30% of the total mortgage amount owed by a homebuyer?
Should a mortgage guarantee insurer be allowed to obtain
reinsurance from a sister insurance company that does not sell
mortgage guarantee insurance?
Specifically, this bill:
1) Provides that a mortgage guarantee insurer may insure up to 30%
of the entire indebtedness of the borrower to the lender.
(Ins. ? 12640.09(a))
2) Provides that the Insurance Commissioner may promulgate
regulations to raise the insurance limit to 35% of the entire
indebtedness, if Freddie Mac or Fannie Mae increases the
required amount of mortgage guarantee insurance. (Ins. ?
12640.09(b)(4))
3) Provides that a mortgage guarantee insurer may obtain
reinsurance from a "sister" insurer that does not sell mortgage
guarantee insurance, if it meets specified financial criteria.
(Ins. ? 12640.09(d)(1)(B))
4) Exempts the California Housing Loan Insurance Fund from
provisions of existing law concerning limitations on the amount
of indebtedness that may be insured, or restrictions concerning
reinsurance. (Ins. ? 12640.09(e))
FISCAL EFFECT:
According to the Department of Insurance, no fiscal impact.
EXISTING LAW:
1) Provides that a mortgage guarantee insurer may insure up to 25%
of the entire indebtedness of the borrower to the lender.
(Ins. ? 12640.09(a))
2) Provides that a mortgage guarantee insurer may exceed the 25%
limit where the excess is insured by a contract of reinsurance.
(Ins. ? 12640.09(c))
3) Provides that a mortgage guarantee insurer may obtain
reinsurance from a "sister" mortgage guarantee insurer, or from
a non-affiliated non-mortgage guarantee insurer that meets
specified financial criteria. (Ins. ? 12640.09(d)(1))
BACKGROUND:
SB 1863
Page 2
1) Mortgage Guarantee Insurance. Protects lenders from losses
resulting from the failure of a borrower to make payment on a
note or bond secured by
a mortgage, deed of trust, or other instrument constituting a lien
or charge on real estate. (Ins. ? 119) By contrast, credit life
insurance provides coverage to the borrower in the event that the
borrower is unable to make payment on a mortgage or deed of trust.
(Ins. ? 779.2)
An insurer must possess a certificate of authority before it
may issue mortgage guarantee insurance. (Ins. ? 12640.07)
Such insurance may be written only to insure loans secured by
qualifying first liens or junior liens.
Generally, a mortgage guarantee insurer may not insure risk
that exceeds 25 times its policyholders' surplus. (Ins. ?
12640.05) Existing law requires that the ceding company and
the reinsurer be "sister" companies, i.e., not in a
parent-subsidiary relationship, so that the same capital cannot
be counted twice for the 25 to 1 calculation. Thus existing
law prohibits companies from attempting to insure 50 times the
policyholders' surplus of itself and that of its subsidiaries.
2) Freddie Mac and Fannie Mae. Fannie Mae was established by
Congress in 1938 to provide stability in the secondary market
for home mortgages, to increase the liquidity of mortgage
investments, and to improve the distribution of investment
capital available for home mortgage financing. Fannie Mae
accomplishes these tasks, in part, by purchasing mortgages on
the secondary market, thereby replenishing the primary lenders'
funds, enabling them to make additional loans.
Freddie Mac was established by Congress in 1970 to promote
certain types of mortgages by use of secondary markets. In
1994, it purchased $124 billion of mortgages, approximately
one-fifth of all mortgages originated.
ARGUMENTS IN SUPPORT:
1) Will conform California law to federal loan program
requirements. Triad Guarantee Insurance notes that the federal
home loan programs, Freddie Mac and Fannie Mae, recently
announced that they were increasing their mortgage guarantee
coverage requirements from 25% to 30%, for mortgages with a
loan to value ratio of more than 90%. Due to the loan limits
imposed by existing law, California insurers will have to
obtain reinsurance for 5% of the risk on certain loans sold to
Freddie Mac or Fannie Mae on the secondary mortgage market.
This would cause unnecessary accounting, administrative and
insurance costs to such insurers.
The Department of Insurance, the sponsor of this measure,
states that this measure will allow mortgage guarantee insurers
to retain the full 30% of the loan without having to purchase
reinsurance. This legislation will allow insurers in
SB 1863
Page 3
California to operate more efficiently and competitively, which
will reduce the cost of mortgage guarantee insurance to
California homebuyers.
2) Will allow reinsurance with affiliated non-mortgage guarantee
insurers. Existing law allows a mortgage guarantee insurer to
obtain reinsurance from a "sister" mortgage guarantee insurer,
or from a non-affiliated insurer that sells any line of
insurance, so long as it meets specified financial criteria.
However, these provisions omitted the question of whether a
mortgage guarantee insurer could obtain insurance from a
"sister" company that sells other lines of insurance.
This measure corrects that anomaly, and provides that a
mortgage guarantee
insurer may obtain reinsurance from a company that sells other
lines of insurance, including sister companies, so long as the
reinsurer meets the financial criteria required by existing law.
ARGUMENTS IN OPPOSITION: None.
REGISTERED SUPPORT / OPPOSITION:
Support
Department of Insurance (sponsor)
Mortgage Insurance Companies of America
Triad Guarantee Insurance
Opposition
None on file.
Analysis prepared by: Daryl M. Thomas / ains / (916)445-9160