Federal regulators are seeking public comment on their new Basel III capital proposals and there are hints they may be changing their stance on private mortgage insurance when it comes to calculating risk weightings for residential mortgages.

In an outline of the Basel III approach released in June, regulators based the risk weightings mainly on the loan-to-value ratios of the first and second liens. Banks could “not recognize private mortgage insurance for purposes of calculating the LTV ratio,” according to a Basel III capital proposal.

The notice of proposed rulemaking issued last Aug. 30 noted that it would not be “prudent” to recognize PMI “due to the varying degree of financial strength” of the mortgage insurance companies.

However, the banking agencies are seeking comment on whether to recognize private mortgage insurance if the insurer is financially sound.

“What criteria could the agencies use to ensure that only financially sound PMI providers are recognized?” asks the notice of proposed rulemaking.  

The comment period on the Basel III capital proposals ends Oct. 22.

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