Insurance: Bank One Assume 50% Mortgage Risk

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Bank One Corp. has gained the right to an additional slice of the mortgage reinsurance pie.

The bank company has become the first in the nation to be granted a state license to share half the risk taken by underwriters of mortgage insurance. Until now, banks have been able to take only a 25% risk.

Maine last week issued Bank One a license to set up a captive insurance subsidiary, Banc One Private Mortgage Insurance Co.

Bank One's subsidiary in Falmouth, Maine, will reinsure policies issued in conjunction with mortgages that Bank One originates anywhere in the country.

"It's just a breakthrough for banks in insurance," said Glen Milesko, president of Bank One's insurance unit. "The Chinese Wall has never kept anyone out of China for long."

Mortgage insurance policies are issued to customers whose down payment is less than 20% of the property value.

Many institutions and secondary mortgage markets require the insurance against losses from early mortgage defaults. The insurance gives more borrowers a chance to own a home.

Mr. Milesko said getting cut in on underwriting revenues will be profitable in the long run.

For a policy's first 10 years, half the premiums paid must be held in escrow against potential losses, he said.

The bank will work with United Guaranty Corp. and PMI Mortgage Insurance Co., two specialized underwriters. These companies write only private mortgage insurance to meet state regulations, Mr. Milesko said.

In a 1996 decision, the Office of the Comptroller of the Currency gave national banks the right to establish such subsidiaries.

Though banks such as Citicorp and Chase Manhattan have reinsurance units offshore, states only recently have begun to relax laws to allow U.S.- domiciled activities.

Vermont, which issued its first captive mortgage insurance license in 1995, has licensed 24 banks or consortiums of smaller banks-the most in the nation, said Derick A. White, assistant director of captive insurance for the state.

Still, Vermont will grant only a 25% risk share to banks for fear of upsetting the proven stability of the eight traditional mortgage insurers that serve the market, Mr. White said.

On those grounds, it turned away Bank One's application for a 75% risk share-even though the program looked sound, Mr. White said.

"The money is up in a trust, it's fully funded, and there's really no problem with risk," he said of Bank One's application.

Maine's groundbreaking move will prompt Vermont to reconsider its 25% cap, he said.

Maine, whose independent Gov. Angus King's slogan "Maine is on the move" is stuck to bumpers statewide, was ready to roll out the red carpet for Bank One.

"If it's a sound program, Maine is willing to take a look at it with an open mind," said Alessandro A. Iuppa, Maine's insurance superintendent. Other banks have made inquiries recently, he said.

With Bank One's wide base of mortgage originations, Maine felt the risks were sufficiently distributed to reduce the likelihood of broad losses, Mr. Iuppa said. He said Maine would have had a different view if a bank had suggested reinsuring mortgages strictly on coastal properties.

Maine and Vermont are ahead of other states in mortgage reinsurance because they are unusually aggressive in seeking new business, said National Association of Insurance Commissioners spokesman Robert P. Martin.

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