As regulators decide on the latest round of capital standards for banks, known as Basel III, one important element under consideration is what credit should be given for mortgage insurance. Private Mortgage Insurance (PMI) is a key part of the risk curve, which ensures that when a borrower defaults on their loan, the losses are absorbed in a logical, sequential, and predictable way.
At the steepest end of the curve, losses are absorbed by the borrower’s own equity. Behind that stands PMI, a critical layer of protection, especially for first-time homebuyers who make up the heart of the market. Only after those layers are exhausted does the risk flow further downstream to the lender and/or investor; often a bank or Fannie Mae and Freddie Mac. And at the very bottom of the waterfall, in the thinnest, most extreme tail of the distribution, stands the taxpayer.
This system distributes risk fairly and logically, maintaining a healthy, functioning housing market.
As federal banking regulators finalize the new Basel III capital standards, they should carefully construct and include risk weights that appropriately recognize mortgage insurance as an important risk mitigant.
While this may seem like a technical matter, the stakes are high. In any given year, 30–40% of purchase originations support homebuyers with down payments of less than 20%, most of whom are first-time homebuyers. How the regulators treat PMI in the capital framework impacts the availability and affordability of bank portfolio mortgage products for low down payment homebuyers.
The National Housing Conference, alongside an unusually broad coalition of banks, insurers, and housing advocates, has urged the agencies to recognize the proven, measurable risk reduction provided by PMI because it is an essential component of how our housing finance system works today. While regulators already recognize PMI in determining whether certain loans are prudently underwritten, they’ve asked critical questions on whether and how to recognize PMI in the updated capital frameworks’ risk weights for mortgages.
The data shows it merits additional recognition. An independent analysis by Milliman of over 90 million GSE loans found that for loans originated during the crisis years of 2005–2009, the net loss severity on an uninsured loan with 20–40% equity was 52%. For a 90–100% LTV loan with mortgage insurance, the net loss severity after claims was just 29%. This is not a marginal effect. This is the system working as designed, with PMI absorbing the lion’s share of the loss so that downstream investors do not have to.
To be fair, this reticence isn’t born from nothing. Regulators have long memories. During the 2008 financial crisis, when underwriting standards collapsed, the mortgage insurance industry, like nearly every other part of the financial system, was overwhelmed. PMI did not perform the role it was supposed to play, and the GSEs and ultimately the taxpayer were pulled further up the loss curve than they should have been.
That caution is understandable, but it’s based on a memory of an industry that has fundamentally changed. The post-crisis reforms are not window dressing. They were a fundamental rebuilding of the entire system, and the mortgage insurance industry was subject to one of the most rigorous overhauls of all.
First, through the Private Mortgage Insurer Eligibility Requirements (PMIERs), the Federal Housing Finance Agency (FHFA) established a new regulatory paradigm. This isn’t the light-touch regulation of the past. PMIERs impose granular, loan-level, risk-based capital floors, strict liquidity standards, and operational controls. They are specifically designed to ensure that MI companies can pay claims through a severe housing downturn, not just a mild one. Today, the six active MI companies hold capital buffers well above those demanding minimums.
Second, the Consumer Financial Protection Bureau’s Ability-to-Repay and Qualified Mortgage rule slammed the door on the toxic underwriting practices that made pre-crisis loans so fragile in the first place. The no-doc, interest-only loans that fueled the crisis are gone, replaced by a system that requires lenders to verify a borrower’s ability to pay.
Third, the industry itself has transformed its business model. Since 2015, MI companies have transferred more than $92 billion of risk to the global capital and reinsurance markets. This isn’t risk that has been hidden; it has been transferred to sophisticated parties who are paid to bear it.
The most compelling part of this story is that one federal regulator has already figured this out. FHFA, which oversees Fannie Mae and Freddie Mac, explicitly recognizes the risk-reducing power of PMI in its own Enterprise Regulatory Capital Framework. FHFA’s model doesn’t pretend PMI is a 100% guarantee, and no one is asking for that. It applies a reasonable haircut to account for counterparty risk and calibrates capital to more accurately match the actual risk profile of a loan to the GSEs. Bank regulators should adopt a similar approach.
This isn’t just a technical debate. This is about who gets to own a home and who does not. PMI is the primary mechanism that allows first-time and working-class families to buy homes with a 3–5% down payment instead of spending a decade saving for 20%. In 2025 alone, more than 800,000 families used private MI to purchase or refinance a home. Nearly two-thirds of those were first-time homebuyers.
When capital rules ignore the credit enhancement those borrowers are paying for, banks are forced to hold more capital than the actual risk warrants. That cost gets passed on. It means higher mortgage rates and fees for the very families who can least afford them.
We got into the last crisis because risk was hidden, mispriced, misunderstood, and too often ignored. We have spent the last 15 years building a stronger, more transparent, and more resilient system. We rebuilt the private mortgage insurance industry so that it could reliably absorb credit risk that would otherwise fall on lenders, the GSEs, and the taxpayer. Bank capital rules should reflect the significant progress we have made.