OCC Frees Banks to Get into Reinsurance Business

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The Office of the Comptroller of the Currency will permit banks to enter the mortgage reinsurance business.

The move could bolster their profits and encourage broader participation in residential lending.

The regulator's decision, given in a letter to a mortgage insurer, means banks will be able to collect a share of the insurance premiums paid by people who make small down payments on their homes. In return, the banks would have to assume some of the default risk.

Pools of affordable-housing loans that typically don't qualify for mortgage insurance may now be insurable. Once the loans were insured, the banks could sell them on the secondary market.

In recent years, mortgage lenders have seen their margins shrink, while the eight major mortgage insurers have typically enjoyed consistent profitability.

An executive at one large national bank hailed the decision, saying that mortgage reinsurance subsidiaries would give banks "the ability to expand lending activity and participate in the premium income of mortgage insurers."

But the bank executive added that the mortgage insurers' continued prosperity makes it especially important for mortgage lenders to partner with mortgage insurers.

"The rest of us are scratching and crawling to make money," the banker said.

In a letter to the Comptroller's Office in August, United Guaranty Residential Insurance Co. asked it to confirm that national banks may establish mortgage reinsurance subsidiaries.

OCC Chief Counsel Julie L. Williams wrote back saying that it would be permissible under the National Bank Act for a bank to reinsure portions of mortgage insurance on loans originated or purchased by a bank or its lending affiliate.

"Mortgage reinsurance is a natural extension of the type of activity (banks) do already, evaluating credit risk in originating mortgage loans," Ms. Williams said in an interview.

Mark Amacher, United Guaranty's vice president of strategic planning and marketing, said that his company, a subsidiary of American International Group, began its first alliance with a nonbank mortgage lender in 1993, and that more than 10% of United's revenues now come from reinsurance partnerships. It now hopes to line up banking participants.

According to the letter to United Guaranty, banks that wish to set up a mortgage reinsurance subsidiary would have to apply to the OCC. The reinsurer, if approved, would be captive, since it would be wholly owned by the bank and would insure only its parent's risks.

Ms. Williams wrote in the letter that it would be a bank's responsibility to disclose to borrowers that a reinsurance subsidiary would get some the insurance premium.

She added that borrowers must be assured that premiums for mortgage insurance will not be changed because of the existence of the reinsurance subsidiary, and that borrowers must be given the option of having their loans excluded from reinsurance agreements.

The Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. will not purchase uninsured loans with down payments of less than 20% down payment. The lender is covered by the insurance, but the borrower pays the premiums.

Gerald L. Friedman, chief executive of Chicago-based Amerin Guaranty Corp., another mortgage insurer, said it did not directly lobby the OCC, as United Guaranty did. But several national banks willing to partner with Amerin have made inquiries to the OCC, he said.

He added that some of these banks could probably have captive mortgage reinsurance subsidiaries up and running by the middle of next year.

Ms. Williams confirmed that some banks have been in touch with the OCC about mortgage reinsurance, but she declined to name any.

Mark L. Korell, group president of Norwest Mortgage Inc., said that in light of the OCC's decision Norwest would be looking "more seriously" at mortgage reinsurance as a possible line of business.

He added that Norwest Mortgage, the nation's largest mortgage originator and servicer and a subsidiary of banking giant Norwest Corp., has had conversations with several mortgage insurers about captive mortgage reinsurance.

And although bank-owned mortgage lenders have become the more dominant players in the business, the OCC's decision will level the playing field for banks with respect to mortgage reinsurance.

No bank has a mortgage reinsurance subsidiary, but several nonbank-owned mortgage lenders already have partnered with mortgage insurers and have set up captive mortgage reinsurance subsidiaries. The OCC does not regulate mortgage companies not owned by banks.

Countrywide Credit Industries, an independent mortgage company and the nation's second-largest originator and servicer, has two captive reinsurance subsidiaries. According to a Countrywide spokeswoman, one company, Charter Reinsurance Corp., was set up in May 1995 in conjunction with Amerin. Second Charter Reinsurance Corp. was established in May 1996 with United Guaranty and GE Capital Mortgage Insurance Corp.

Another mortgage insurer, Triad Guaranty Insurance Corp., also has captive reinsurance agreements with some nonbank mortgage lenders. Ron Kessinger, Triad's executive vice president, said it was looking at marketing this product to banks as well.

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