Mortgage Insurers are Strong Counterparties, New Capital Standards Further Enhance Reliability
Much progress has been made, but more can be done to ensure the housing finance system is on a more sustainable footing. A key priority must be to position the private sector – not taxpayers – to bear more of the risks of another housing downturn. Policymakers are now considering proposals to de-risk the Government Sponsored Enterprises (GSEs) through greater reliance on private capital, such as expanded front-end risk sharing using private mortgage insurance (MI).
MI Reliably Transfers Credit Risk
MI is a first layer of protection against mortgage credit losses and a time-tested method of risk sharing that has been used by the GSEs and others on low down payment loans for more than 50 years.
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, never received any bailout money from the Federal government, and continued to write new insurance. In fact, since the crisis, mortgage insurers have paid 100 percent of valid claims, with 97 percent paid in cash and the remainder schedule to be paid over time.
Snapshot of Originations from 2000-2016 Shows MI Consistently in the Market
Percentage of Total Originations; Source: Inside Mortgage Finance
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. Going forward, mortgage insurers are even more reliable thanks to new master policies that provide enhanced contractual certainty on how and when mortgage insurers pay claims.
MI Capital Is Strong
Mortgage insurers have new higher capital standards under the Private Mortgage Insurer Eligibility Requirements, or PMIERs, issued by the GSEs. PMIERs nearly doubled the amount of capital each mortgage insurer is required to hold. More capital further boosts the industry’s ability to pay claims in good times and bad. All mortgage insurers have met or exceeded PMIERs requirements as of December 31, 2015. Mortgage insurers have raised $14 billion in new capital since the financial crisis, and are well positioned to raise additional capital to meet demand.
Most mortgage insurers now must hold capital assets over 7 percent, compared to the 2 percent capital standard at FHA. While each GSE has a capital buffer of $600 million in 2017, according to the terms of the senior preferred stock purchase agreement with Treasury, by 2018, the GSEs are required to be at 0 percent capital under conservatorship.
The MI industry is backed by private capital, which stands ready to take on first loss mortgage credit risk ahead of the taxpayer. In contrast, the GSEs are government-controlled entities that expose taxpayers to losses from mortgage credit risk.
Ample Capacity and Opportunity for Greater Risk Sharing with MI
Since 2103, the GSEs have purchased over $4.1 trillion in mortgage loans. About 39 percent of those loans, or roughly $1.61 trillion, have been included in the GSEs’ expanded credit risk transfer (CRT) transactions. Only about 3.3 percent ($54.1 billion) of the unpaid principal balance of the loans included in CRT has been transferred—using virtually all back-end transactions. This represents a mere 1.3 percent of the GSEs’ overall risk.
Today, mortgage insurers are more resilient and reliable counterparties, dedicated to providing access to housing finance credit in good and bad economic times. The time is right to move forward to expand front-end risk sharing with MI, and USMI members are ready to do more.
U.S. Mortgage Insurers (USMI) is dedicated to a housing finance system backed by private capital that enables access to housing finance for borrowers while protecting taxpayers. Mortgage insurance (MI) offers an effective way to make mortgage credit available to more people. USMI is ready to help build the future of homeownership.