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

California Gov. Arnold Schwarzenegger has signed legislation giving a regulator the authority to ease capital requirements for mortgages insurers.

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

In addition, the company said enactment of the bill would support the recovery of housing markets in California and nationwide. It was patterned after legislation enacted by Arizona last month and in July by North Carolina.

Effective Jan. 1, 2010, the new law grants the insurance commissioner discretion to permit a mortgage guaranty insurer to continue to transact new business if its capital falls below statutorily prescribed levels.

Prior law required mortgage insurers to automatically cease transacting new business if they failed to meet such statutorily prescribed capital levels.

"This change provides the insurance commissioner added flexibility in assessing the strength of mortgage guaranty insurers that operate in California and aligns California with similar reforms recently enacted in other states that have mortgage guaranty statutes, including Arizona, Wisconsin and North Carolina," said PMI.

The company added that the recent reforms enacted by these states "signify important support of the mortgage insurance industry and indicate its importance in the housing recovery."

However, despite the legislation, PMI said its expects that, as a result of continued losses, the company will need to raise significant additional capital–possibly this year–and even with loosened requirements it could be in difficulties and have to stop writing new business.

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

There is "no assurance that the Arizona or California Department of Insurance will exercise its discretion to permit PMI to write new business in the event PMI does not meet the minimum policyholders position required by law," the company said.

Moreover, even if those Departments of Insurance permit PMI to continue writing new business, it may be unable to write new business in other states where it fails to meet regulatory capital requirements, and regulators in other states could take the position that PMI must suspend writing new business nationwide, the firm said.

In states that do not have capital adequacy requirements, it is not clear what actions the applicable regulators would take if PMI failed to meet the capital adequacy requirement established by another state, the company said.

It added that if PMI fails to meet the capital adequacy requirements in one or more states, PMI may have to immediately suspend writing business in some or all states in which it does business.

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