Mortgage insurance protects mortgage lenders against losses on mortgage loans arising from default by borrowers. In July 2005, MAS announced an increase from 80% to 90% in the “loan-to-value” (LTV) limit for housing loans granted by banks. Together with this increase, we also announced that we are prepared to consider mortgage insurance as an alternative risk mitigant to higher capital charge on loans with LTVs exceeding 80% and that we would study the appropriate regulatory framework for mortgage insurers.
In October 2006, we conducted a public consultation on the regulatory framework for the mortgage insurance business and treatment of mortgage insurance in the calculation of the capital requirements for Singapore-incorporated banks. The framework was finalised and implemented in the first quarter of 2007.
Under the new regime, mortgage insurers must operate as mono-line insurers and establish contingency reserves for peak losses during downturns in the economic and property cycles. In addition, all mortgage lenders must make adequate disclosure to borrowers where mortgage insurance arrangements create any obligation on the borrowers or confer mortgage insurers any right against borrowers. For the purpose of calculating regulatory capital requirements, Singapore-incorporated banks may now recognise the credit risk mitigation effects of qualifying mortgage insurance on housing loans with an LTV exceeding 80%.