NU Online News Service, Oct. 13, 3:09 p.m.EDT

California Gov. Arnold Schwarzenegger has signed legislationgiving a regulator the authority to ease capital requirements formortgages insurers.

His action yesterday was immediately hailed by Walnut Creek,Calif.-based mortgage insurer PMI. The firm said the measure couldprovide regulatory relief to PMI and other financially troubledmortgage insurers.

In addition, the company said enactment of the bill wouldsupport the recovery of housing markets in California andnationwide. It was patterned after legislation enacted by Arizonalast month and in July by North Carolina.

Effective Jan. 1, 2010, the new law grants the insurancecommissioner discretion to permit a mortgage guaranty insurer tocontinue to transact new business if its capital falls belowstatutorily prescribed levels.

Prior law required mortgage insurers to automatically ceasetransacting new business if they failed to meet such statutorilyprescribed capital levels.

"This change provides the insurance commissioner addedflexibility in assessing the strength of mortgage guaranty insurersthat operate in California and aligns California with similarreforms recently enacted in other states that have mortgageguaranty statutes, including Arizona, Wisconsin and NorthCarolina," said PMI.

The company added that the recent reforms enacted by thesestates "signify important support of the mortgage insuranceindustry and indicate its importance in the housing recovery."

However, despite the legislation, PMI said its expects that, asa result of continued losses, the company will need to raisesignificant additional capital–possibly this year–and even withloosened requirements it could be in difficulties and have to stopwriting new business.

It cautioned that there is a risk that the company may be unableto maintain minimum regulatory risk-to-capital and policyholderssurplus requirements in Arizona and other states as early as thethird or fourth quarters of 2009.

There is "no assurance that the Arizona or California Departmentof Insurance will exercise its discretion to permit PMI to writenew business in the event PMI does not meet the minimumpolicyholders position required by law," the company said.

Moreover, even if those Departments of Insurance permit PMI tocontinue writing new business, it may be unable to write newbusiness in other states where it fails to meet regulatory capitalrequirements, and regulators in other states could take theposition that PMI must suspend writing new business nationwide, thefirm said.

In states that do not have capital adequacy requirements, it isnot clear what actions the applicable regulators would take if PMIfailed to meet the capital adequacy requirement established byanother state, the company said.

It added that if PMI fails to meet the capital adequacyrequirements in one or more states, PMI may have to immediatelysuspend writing business in some or all states in which it doesbusiness.