The use of lenders’ mortgage insurance (LMI) policies in residential mortgage-backed securities is falling, according to S&P Global Ratings.

The trend is reducing the traditionally strong influence that mortgage insurers’ underwriting standards have on lenders’ underwriting policies, the ratings agency says.

The decline of LMI is also changing the way the market defines prime and non-conforming home loans. Prime loans are made to borrowers with a clean credit history.

The major banks have less than 25% exposure to LMI, S&P says.

The decline in LMI reflects the banks’ reduced appetite for high loan-to-value ratio lending, which has slowed due to tightened lending standards.

A regulatory focus on lending standards is now the dominant factor shaping underwriting policies, S&P says.

It does not expect exposure to LMI to be completely removed from residential mortgage-backed securities portfolios in the short term.

A decline in LMI usage will not cause lending standards to deteriorate, because the Australian Prudential Regulatory Authority will continue monitoring them, S&P says.