Reducing Taxpayer Risk With MI
More needs to be done to put our housing finance system on a more sustainable footing, with the private sector – not taxpayers – bearing a greater share of the risks of a housing downturn.
MI reduces taxpayer exposure by reliably transferring to private capital participants a substantial portion of mortgage credit risk. Mortgage insurers covered more than $50 billion in claims since the GSEs entered conservatorship, resulting in substantial savings to taxpayers. Throughout the financial crisis, USMI member companies never stopped paying claims, and never received any bailout money from the Federal government. In fact, mortgage insurers have paid all valid claims, with 96 percent paid and the remainder due over time.
Mortgage insurers have a long history of consistently offering mortgage insurance even during significant market downturns. This makes MI very different from capital markets structures, which disappeared during the crisis and have not returned in any meaningful volume since.
The MI industry’s safety and soundness has been enhanced in recent years to make mortgage insurers even more resilient and reliable. Going forward, mortgage insurers are more reliable thanks to new master policies that provide enhanced contractual certainty on how and when mortgage insurers pay claims. Moreover, mortgage insurers have materially increased their claims paying ability due to new higher capital standards mandated under the Private Mortgage Insurer Eligibility Requirements (PMIERs), issued by the GSEs.
USMI supports several policy actions to reduce taxpayer risk further through the use of MI:
- Protecting Taxpayers by Expanding Use of Deeper MI in GSE Risk-Sharing. Pending meaningful Congressional action on housing finance reform, significant incremental progress toward reducing taxpayer risk can be accomplished through greater use of MI. On GSE loans with down payments below 20 percent, MI coverage currently goes up to 35 percent of the loan value. Increasing that coverage to 50 percent (Deeper Cover) would put more private capital at risk and would decrease taxpayer risk. MI can also provide cover on loans at or below 80 percent LTV, which otherwise have no risk transfer and thus pose a risk to taxpayers. Doing so further reduces the risk concentrated at the GSEs.
USMI welcomes FHFA’s requirement in the 2016 scorecard process for the GSEs to engage in more risk sharing with the private sector, and we remain committed to working with FHFA and the GSEs on concrete steps to take greater advantage of the benefits of front-end risk sharing with Deeper Cover MI. According to third party analysis, Deeper Cover MI not only reduces taxpayer risk, it could also lower borrower costs. And it does so in a way that is easily accessible for lenders of all sizes. Deeper Cover MI provides a sensible transition forward that does not disrupt the smooth functioning of the large, complex U.S. housing finance system. Legislation introduced by Sen. Shelby and passed by the Senate Banking Committee includes a provision that would require the GSEs to engage in front-end risk sharing transactions. USMI supports the inclusion of front-end risk share as part of Senator Shelby’s regulatory relief bill. This effort has been joined by growing bipartisan support encouraging FHFA to expand and better define the development of credit risk transfer programs.
- Strengthening the Role of MI in Comprehensive Reform Legislation.Today, MI plays a significant role in reducing taxpayer risk on loans purchased or securitized by the GSEs. While the GSE charters set minimum requirements for MI coverage, for nearly 20 years the market practice has been to use greater protection than the minimum required. This additional level of MI, also known as “standard coverage,” has served the housing finance system well and represents a vital source of private capital supporting GSE loans, providing substantial taxpayer protection at an affordable cost to borrowers. The benefits of standard MI coverage should be preserved when considering policy alternatives to ensure that taxpayers are at a more remote risk of loss in any reformed system. Standard coverage was appropriately made part of recent bipartisan housing reform legislation, and USMI fully supports proposals advanced in the last Congress (S. 1217) to put the housing finance system on a more sustainable path. As discussed above, deeper and broader use of MI could further limit taxpayer exposure. MI provides policymakers a tool already used by lenders of all sizes with which to build a new housing finance system where private capital stands in front of taxpayer risk.
- Striking the Right Balance for Taxpayers in Establishing Complementary Roles for FHA and MI. The MI industry and FHA should serve in complementary roles to promote broad and sustainable homeownership. But to do that, FHA needs to become more financially resilient, in line with the rest of the financial system, and remain focused on its core mission of serving underserved communities. Private mortgage insurers that put their own capital at risk to mitigate mortgage credit risk should be positioned to assume that risk whenever possible, consistent with the principles guiding GSE reform. Taxpayers continue to face exposure to more than $1 trillion in FHA-insured mortgage credit risk, without adequate capital held against that risk. USMI continues to call for reforms to the FHA capital standard, including increasing the Mutual Mortgage Insurance Fund’s minimum capital ratio to reduce the chances of another taxpayer bailout in future market downturns, and stress testing those levels to ensure the Fund’s financial position is more consistent with the risks assumed. In addition, FHA should be dissuaded from taking on risks in market sectors where private MI is readily available.