The Federal Housing Finance Agency (FHFA) issued its draft Private Mortgage Insurer Eligibility Requirements (PMIERs) yesterday, and while the new rules would be more restrictive, Genworth Financial Inc (NYSE:GNW) and Essent Group Ltd (NYSE:ESNT) were both positive in their initial feedback.
Essent Group already meets draft requirements
“We commend FHFA, Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) for all of their work in revising the PMIERs,” said Essent Group Ltd (NYSE:ESNT) Chairman and CEO Mark Casale in a statement. “We believe that the proposed risk-based capital adequacy framework in the PMIERs is fundamentally sound.”
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Essent Group Ltd (NYSE:ESNT) will include a more detailed response to the proposed PMIERs in its second quarter earnings release due in August, but according to BTIG analyst Mark Palmer, who rates Essent a Buy, it won’t need to raise any additional capital under the new rules. The proposed PMIERs would require Essent to maintain a risk-to-capital ratio of 17.85:1 (or 5.6% of risk exposure). That’s a fair jump from typical state-level requirements of 25:1, but Essent was already at 16.1:1 as of their last earnings report.
Genworth Financial would need up to $550 million, but has plenty of options
Genworth Financial Inc (NYSE:GNW) isn’t in quite as strong a position, but it was also broadly supportive of the draft PMIERs. It estimates that it will need to raise an additional $450 million to $550 million capital by June 30, 2015 to meet the new requirements, but that this amount decreases to $175 million by December 31, 2016. Under the draft proposal companies can make use of a two year transition period to comply, so Genworth could both raise capital and wait for its risk-to-capital ratio to improve organically during that period.
“[Genworth] will have a variety of additional capital sources that could be utilized to satisfy capital requirements, including but not limited to: available deferred tax assets; reinsurance transactions; proceeds from the completed Australian IPO; and proceeds from the issuance of securities at the Genworth Financial Inc (NYSE:GNW) and/or the Genworth Holdings levels,” the company wrote.
Palmer points out that MGIC Investment Corp. (NYSE:MTG) and Radian Group Inc (NYSE:RDN) were both far more critical of the proposals (Radian would need to raise an additional $850 million, for instance), and that this could ultimately benefit Genworth Financial Inc (NYSE:GNW). Genworth said that it will work with the FHFA to refine the draft PMIERs, but with other companies pushing hard for a looser capital-to-risk ratio, Buy-rated Genworth could see a manageable capital hurdle go even lower