Capital rules should reflect the risk mitigation of mortgage insurance

• Key insight: As regulators look to finalize the Basel III endgame rules, they would do the banking industry and American homebuyers a service by recognizing the risk-reducing role mortgage insurance plays on bank balance sheets.
• Supporting data: Analysis of more than 90 million GSE loans over a 25-year period found that private mortgage insurance reduced net realized loss severity on insured high loan-to-value loans to below the gross loss severity of loans with 20% to 40% down payments.
• Forward look: Regulators do not need to choose between expanded homeownership opportunities and safety and soundness. Recognizing the proven risk-mitigating value of private MI in the final rule would advance both objectives.

As regulators finalize a proposal to update bank capital requirements, they have an opportunity to strengthen access to homeownership without compromising safety and soundness. One seemingly technical decision, how private mortgage insurance, or MI, is treated under those rules, could make a meaningful difference in the availability and affordability of low-down payment bank mortgages for creditworthy borrowers.

The federal banking agencies are currently reviewing comments on the proposal, commonly known as the Basel III endgame, which would revise capital requirements for banks and influence how institutions allocate capital across lending activities. A key question is whether the final rule will appropriately recognize the risk-mitigating value of MI on loans that banks retain in portfolio or securitize through private-label markets.

Low down payment mortgages — those with down payments of less than 20% — represent approximately 40% of first-lien single-family residential mortgage purchase originations each year. The bank portfolio share of this high loan-to-value, or LTV, ratio segment is small, and a key contributing factor is that the current prudential oversight framework provides limited capital benefit to banks which use MI to reduce their exposure to credit losses.

The current capital treatment of private MI for banks is asymmetrical to the MI benefit the government sponsored enterprises, or GSEs, Fannie Mae and Freddie Mac, receive under their capital framework. In the recent Basel proposal, the agencies sought input from market participants regarding whether MI should be factored into a loan's LTV calculation used to determine risk-based capital and, if so, how. Nearly 30 commenters supported providing credit for MI in the determination of a loan's risk-based capital requirement beyond the credit already provided under banking regulation's "prudently underwritten" requirements.

Providing appropriate recognition for MI in bank capital requirements would produce several benefits. First, it would better align capital requirements with both the GSE framework and MI's demonstrated loss-mitigating performance. Second, it would bring regulatory capital treatment into closer alignment with the benefits banks already recognize under the Current Expected Credit Loss, or CECL, standard when estimating credit losses. Finally, more efficient capital treatment, combined with lower loss reserves, could support more competitive mortgage pricing for loans retained on bank balance sheets.

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As the MI industry noted in its comment letters, private MI responsibly expands access to credit, but not at the expense of safety and soundness. Private MI companies have paid more than $62 billion in claims since the Great Financial Crisis. Analysis by Milliman, a global actuarial firm, of more than 90 million GSE loans over a 25-year period found that private MI reduced net realized loss severity on insured high LTV loans to below the gross loss severity of loans with 20% to 40% down payments, including for loans originated during 2005-2009, the period of peak loss severity and catastrophic losses for the U.S. mortgage finance sector.

Private MI is a powerful tool for homebuyers, enabling access to homeownership for borrowers with down payments as low as 3%, saving first-time homebuyers from years of accumulating the cash needed for larger down payment. In 2025, the private MI industry helped more than 800,000 borrowers qualify for loans totaling approximately $311 billion. It is also the only scalable form of credit enhancement, protecting loans from lenders of all sizes and business models, including small community banks and large global institutions.

The Basel III endgame proposal, with slight modifications, will be even more fine-tuned to achieve one of the stated objectives of the banking agencies: to encourage banks to increase their presence in the nation's mortgage finance ecosystem.

Providing appropriate credit for MI — credit that reflects the historical loss-mitigating performance of MI and is more aligned with the GSEs' framework — is one critical modification that would prudently increase the ability of banks to increase their investment in bolstering affordable and sustainable homeownership opportunities for all Americans. Regulators do not need to choose between expanded homeownership opportunities and safety and soundness. Recognizing the proven risk-mitigating value of private MI in the final rule would advance both objectives.