Private mortgage insurers are getting a better shake than expected under new capital requirements from Fannie Mae and Freddie Mac.

Two legacy insurers-- Radian and MGIC -- had predicted they would fall well short of the minimum capital needed to do business with Fannie and Freddie under the original proposal. They now predict they will have to raise less money than initially anticipated.

"The shortfall has come down significantly, so there is less pressure and less uncertainty about the ability to become compliant," said Stanislas Rouyer, the associate managing director of Moody's Investors Service. "There are still some questions as to how some companies will become compliant."

Radian now expects a capital deficit of $605 million, below an earlier projection of $850 million. MGIC projects a shortfall of $230 million, 62% lower it had expected. (See related chart)

However, another legacy company, Genworth, raised the range of its estimated shortfall from between $450 million and $550 million to between $500 million and $700 million.

Genworth has been hurt by problems with its long-term care insurance segment. It is likely that Genworth will need to raise external capital, said Bose George, an analyst with Keefe, Bruyette & Woods. The company is selling a 14% stake in its Australian MI unit and the proceeds are likely to go towards meeting the capital standards.

Radian recently shored up its capital position with the sale of Radian Asset Assurance.

A fourth legacy private mortgage insurer, United Guaranty Corp., is an American International Group subsidiary and gets capital support from its parent. When asked if it had a shortfall, United Guaranty sent an email reply stating it would be compliant by the Dec. 31 effective date; it declined to elaborate further.

The mortgage insurers can turn to reinsurance to help meet the standards, and George notes that there is "significant availability" in the marketplace.

"It is a reasonably tough rule, but longer term it is beneficial. It positions them well as strong counterparties, so in that sense it is a real positive," George said.

Not all of the private mortgage insurers reported a possible shortfall. Essent Guaranty and Arch Mortgage Insurance said they are in compliance with the standards.

National MI, which like Essent is a de novo, complies with the risk-based requirements but would likely have to raise additional capital to meet Fannie and Freddie's minimum-asset threshold, a Moody's report said. Moody's does not give financial strength ratings for National MI.

When asked about the report, National MI's chief executive, Bradley Shuster, wrote in an email: "As of yearend 2014, National MI had a risk-to-capital ratio of 3.5 to 1, the lowest in the private mortgage insurance industry. We also have the capacity to insure $20 billion of additional new insurance written."

National MI had planned to raise capital to support business growth, Shuster said during the company's conference call on first-quarter results last week.

"So, it is sort of coincidental that we have the [Private Mortgage Insurer Eligibility Requirements from Fannie and Freddie] now to comply with, and so we think that that capital raise will fully satisfy that in addition to giving us the capital we need to grow the business further," he said.

National MI lost $8 million in the first quarter, which is an improvement over the $15 million loss one year prior.

The only major change from the original proposal is in the treatment of older books of business, which recognizes the industry's point that any uncertainty over the performance of these loans has diminished, Rouyer said.

Still unresolved is what risk-weight Fannie and Freddie will give the lender-paid, single-premium insurance policies.

This product has the most price competition among mortgage insurers, Rouyer said.

"But there doesn't seem to be any answer there," he said. "The MIs don't want [Fannie and Freddie] to say, 'No, you can't charge less than X for this type of risk.' [Fannie and Freddie] are looking at it from a capital-adequacy point of view as these policies are not subject to the same termination [rule] as other MI products and therefore have more risks," he said.

The mortgage insurers got Fannie and Freddie to agree to revise the rules every two years, instead of modifying them as market conditions were deemed to warrant it.

The changes did not reduce the capital burden for lower-credit-score loans, and as a result minimized competition between the mortgage insurers and the Federal Housing Administration program.

Private mortgage insurers will probably remain the best option for higher-credit-score, low-down-payment borrowers, and FHA for lower-score consumers, the analysts said.

This might not be such a bad thing as it will mean a higher-quality book of business for the mortgage insurers, Rouyer noted. But it also means "FHA is going to be a meaningful part of the housing finance market and limit the opportunities of the MIs to regain market share," he continued.

The 50-basis-point cut in the FHA premium increased the government program's competitiveness with private mortgage insurance, and is another reason why it will remain a big part of the market, George said.

Competitiveness will be also affected by the Federal Housing Finance Agency's recent action on guarantee fees. "The industry can work with it. The returns are still solid," George said. "But [a cut] would have been a positive because it would have made the industry a little more competitive versus FHA."

There will be a narrow band of consumers with credit scores between 680 and 720 where there will be true price competition between private mortgage insurers and FHA. But this is not the only reason why the mortgage insurers might struggle to grow in the future.

The housing market has remained sluggish and these companies depend on the purchase business gaining strength, George said.

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