A group of New England banks has received federal approval to sell private mortgage reinsurance through a joint venture.
An April 6 interpretive letter recently released by the Office of the Comptroller of the Currency expands upon a 1996 decision letting individual national banks establish mortgage reinsurance subsidiaries and gives small banks an affordable way to enter the business.
"It would be virtually impossible for us to set up a reinsurance subsidiary on our own," said Edward E. Sensor, president and chief executive officer of Banknorth Mortgage Co. in Burlington, Vt. "With this cooperative, we're able to share overhead expenses."
Banknorth Mortgage's parent company, Banknorth Group Inc., has $2.6 billion of assets.
"The ability to join with other lenders to reinsure a larger pool of loans makes this business more readily available to smaller mortgage originators and could be a substantial source of new income," said David W. Roderer, a partner with Goodwin, Procter & Hoar in Washington.
Following the OCC's ruling, Banknorth and 45 other institutions in Vermont, New Hampshire, and Maine formed the New England Mortgage Insurance Exchange, which will act as a "captive insurer" for its members. Captive insurers cover only risks related to the businesses of their owners and may not issue policies for third parties.
Last week the exchange agreed to open membership up to all federally insured institutions in New England.
Several major banking companies have formed captive insurance subsidiaries to provide reinsurance for their mortgage operations, including Chase Manhattan Corp., PNC Bank Corp., Banc One Corp., and Norwest Corp.
Bank reinsurance operations generally contract with a major mortgage insurance company to cover most of the risk associated with a loan. The reinsurance subsidiaries get a percentage of the premiums in return for assuming a portion of the risk.
The New England Mortgage Insurance Exchange has contracted with Mortgage Guaranty Insurance Corp. in Milwaukee to provide the primary coverage.
Acting Comptroller Julie L. Williams, then writing as OCC chief counsel, said the reinsurance cooperative is permitted as part of the business of banking and poses no threat to member institutions because losses will be covered soley by premiums and reserves held by the exchange.
"No participant will be liable for any of the activities of the exchange," she said.
Mr. Sensor, who is also chairman of the exchange, would not disclose what percentage of the premiums members will receive. No dividends are expected for at least three years, however, while the cooperative builds its reserves.
He estimated that the exchange will issue policies covering $409 million in mortgages this year and $1.2 billion in its third year of operation.
One banker participating in the cooperative said he is expecting only modest returns once the exchange begins making payouts to members.
"We're not going to hit a home run," said Stephen F. Christy, president of $362 million-asset Mascoma State Savings Bank in Lebanon, N.H. "We have to get walks and singles and take what we can from each one."