A piece of legislation intended to jump-start California's moribund real estate market may turn out to have far-reaching implications for mortgage insurers operating in that state.
The legislation, which politicians hope will spur home buying, would establish a state-sponsored mortgage insurance fund - called the California Housing Loan Insurance Fund - to provide mortgage insurance to certain homebuyers.
The measures, AB 214 and AB 215, were approved by the California legislature in July and face a referendum Nov. 2.
A Broad Mandate
The California insurance fund would be able to write mortgage insurance, which guarantees principal and interest against default, on a wide range of mortgages, according to John Schienle, the program's director, "We'll only be limited in two ways: that we can only lend to first-time homebuyers and only to people with low and moderate incomes."
Though income restrictions would vary by locale, the maximum qualifying income in the San Francisco area would be $69,900 a year.
Despite this rather broad mandate, Mr. Schienle maintains that the California insurance fund would concentrate on extending mortgage insurance to homebuyers who make down payments of 3% to 4%, a segment of the market not served by private mortgage insurers.
|Life in the Big City'
Mortgage insurers, long inured to government competition in the form of FHA mortgage insurance, are not taking the potential threat lightly.
George Breed, in-house counsel for PMI Mortgage Insurance Co., San Francisco, said the California insurance fund would be a significant competitor, as the FHA is now. "That's life in the big city," he said.
Mr. Breed, who was active in lobbying on behalf of PMI and the mortgage insurance industry during the formation of the legislation, nonetheless is "comfortable" with the proposed entity.
Certainly, mortgage bankers realize that should a government-funded entity start to write insurance in California on loans with down payments of 5% to 20% it could prove a formidable challenge. "They could easily go out and win market share, and if they did it in southern California, I might not be that disappointed," said one industry official.
Others wonder if the agency might eventually be pushed into direct competition with a mortgage insurer in an effort to balance the risk profile of its portfolio.
Mr. Schienle sees his agency's role differently. "We want to create a market in very low down payment insurance, prove its viability, and invite the mortgage insurers to replace us." He also stated that he intends to price his mortgage insurance based on the economics of the transactions, rather than using government funds to subsidize risk.
Closely Watched Market
The California insurance fund would write insurance on a variety of types of loans, including jumbos, and intends to sell them to Fannie Mae and Freddie Mac as well as to conduits. Freddie Mac officials stated that they had not yet received the necessary information to approve the agency.
Mr. Schienle has a mortgage insurance background. He was formerly an executive vice president with Foremost Guarantee Corp., an insurer purchased by GE Mortgage Insurance Corp. in 1986.
Though the turf of mortgage insurers in California seems secure for now, industry observers will be watching closely. The California mortgage fund "represents a potentially significant source of competition, especially because of the size of the California market, said James Schmidbauer, an analyst at Moody's Investors Service.