As the August recess begins, there have been several notable developments in housing finance. Last Thursday, the Consumer Financial Protection Bureau (CFPB) released its Advanced Notice of Proposed Rulemaking on the “Qualified Mortgage (QM) Definition under the Truth in Lending Act” which seeks to revise the QM definition as the GSE Patch nears expiration. Moody’s Investor Service released a proposed update to its residential mortgage-backed security (RMBS) rating methodology which would affect the rating for bonds associated with the GSEs’ CRT transactions and non-agency RMBS. Importantly, the new standard recognizes the loss reducing benefits of private mortgage insurance (MI). The Urban Institute published an article highlighting private MI and the benefits of reducing the severity of losses for those holding mortgage credit risk.
Also, on the regulatory front, as many financial institutions look to implement the Financial Accounting Standards Board’s (FASB) Current Expected Credit Loss (CECL) accounting standard, FASB has announced proposed changes, including delaying the implementation deadline for private companies as well as small public companies. USMI released an update on the treatment of loan level credit enhancement provided under the CECL standard, providing information to lenders of all sizes on how they might mitigate loss reserve requirements under the new standard. Housing finance reform continues to gain attention in recent weeks with Federal Housing Finance Agency (FHFA) Director Mark Calabria recently giving an update on the timing of the release of the Administration’s plans to reform the housing finance system. Lastly, there have been a number of studies and reports in recent weeks that continue to cite consumers’ misperception that they need a large down payment to qualify for homeownership. USMI published a new column that highlights low down payment mortgage options available to help home-ready borrowers attain sustainable homeownership sooner.
- CFPB’s ANPR on Qualified Mortgages. On July 25, the CFPB released an Advanced Notice of Proposed Rulemaking on the “Qualified Mortgage Definition under the Truth in Lending Act.” The CFPB is considering whether to revise the QM definition in light of the pending expiration of the Temporary GSE QM loan category provision, commonly referred to as the “GSE Patch,” in January 2021. The same statutory product restrictions exist for loans under the Patch as for other QM loans, however these loans are not subject to the 43 percent debt-to-income (DTI) limit—a significant exception that has supported a substantial portion of the overall housing market. As takers of first-loss mortgage credit risk with more than six decades of expertise and experience underwriting and actively managing that risk, USMI members understand the need to balance prudent underwriting using a clear and transparent standard to ensure sustainable lending with the need to maintain access to affordable mortgage finance credit for home-ready borrowers. Following the release of the ANPR, USMI published a blog with observations and recommendations for replacing the GSE Patch.
- Moody’s releases proposed update to RMBS ratings. Moody’s recently released a proposed update to its RMBS rating methodology which would affect the rating for bonds associated with the GSEs’ CRT transactions and non-agency RMBS. Importantly, the new standard gives more credit to deals with private MI. USMI submitted a letter on July 29 to Moody’s in response to request for comment by Moody’s on the new standard, which among other things commends Moody’s for many of the necessary updates provided in the proposed standard and asks for additional transparency around details about the benefits of MI, the proposed rejection rates, and Moody’s methodology for determining maximum insurance payout and allocation based on an insurer’s rating.
- Urban Institute publishes article on risk reducing benefits of PMI. Urban Institute released a paper entitled, “Private Mortgage Insurance Reduces the Severity of Losses for Those Holding Risk,” that focuses on Moody’s recent proposed updates to its RMBS rating methodology, which will affect the ratings of bonds for the GSEs’ CRT deals and non-agency RMBS, and would give more credit to deals with MI. In the report, Urban notes, “given the increased focus on the topic, understanding the historical behavior of GSE loans with mortgage insurance is important. Examining Fannie Mae loans from 1999 through the first quarter of 2018, we conclude that PMI reduces the loss severity of loans with high loan-to-value (LTV) ratios by 19 to 24 percentage points—a very substantial reduction. So, it is important to recognize PMI’s contribution when developing measures assessing loan-level risk, giving proper “credit” in sizing capital requirements or assessing subordination levels for securitizations.”
- Current Expected Credit Loss (CECL) accounting standard. Over the last couple of weeks, FASB has announced several proposed changes for the CECL accounting standard, including delaying the implementation deadline for private companies as well as small public companies (those with a market capitalization below $250 million and annual revenue of less than $100 million). If that proposal is enacted, the standard for those companies would not take effect until January 2023. CECL is a fundamental shift in how loss reserves are accounted for and incurred. Instead of waiting until losses are probable, institutions will forecast losses and establish reserves at the time of origination. The final rule was announced on June 16, 2016 and will impact any financial institution that holds loans on its balance sheet at amortized cost, such as banks, credit unions, and real estate investment trusts (REITs). Public companies filing with the Securities and Exchange Commission (SEC) will need to adopt CECL for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
As noted by the Government Accountability Office (GAO), “CECL is considered by some to be the most significant accounting change in the banking industry in 40 years.” Banking regulators – the Federal Deposit Insurance Corporation (FDIC), Federal Reserve, and Office of the Comptroller of the Currency (OCC) – jointly issued a final rule on CECL’s implementation and have proposed changing the allowance for home and lease losses as a new defined term.
Ahead of the implementation, and as lenders look to prepare as the implementation deadline approaches, USMI published a fact sheet on their website to provide information to lenders about the potential impact CECL may have on their books of business and how loan level credit enhancement, such as private MI, can help offset loss reserve requirements.
- FHFA Director gives update on the Administration’s GSE plan. In March President Trump signed an Executive Order that directed federal agencies, most notably the Treasury Department and the Department of Housing and Urban Development, to provide both administrative and legislative solutions for modernizing the housing finance system and ending the conservatorships of the GSEs. Recently in an interview with Reuters, FHFA Director Mark Calabria said that he now expects the Administration will release reports developed by the Departments of Treasury and of Housing and Urban Development that outline the Administration’s plan for releasing Fannie Mae and Freddie Mac from conservatorship to be published at the end of August or early September
Last fall, USMI released a white paper highlighting several areas of alignment around administrative reform that can be implemented in lieu of comprehensive legislative action by Congress. The specific recommendations proposed by USMI include reducing the duopolistic market power of the GSEs, increasing transparency, expanding private capital and reducing taxpayer risk, and promoting a strong regulator that establishes uniform standards and uses transparent processes to assess the GSEs activities and products.
- USMI publishes new column on low down payment options. Earlier this month, USMI published a new column, “Buy a home without breaking the bank.” The column highlights the several solutions available to financial obstacles that may arise when buying a home, such as the 20 percent down payment. According to a recent report, 49 percent of non-homeowners stated that not having enough money for a down payment and closing costs was a major obstacle to purchasing a home. But data shows many aspiring homebuyers can afford to buy a home with less than 20 percent. Another survey found that among first-time homebuyers who obtained a mortgage, approximately 80 percent had down payments of less than 20 percent. The article links readers to LowDownPaymentFacts.com where consumers can learn about the number of different low down payment mortgage options available to them and how to become “home-ready.”
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 offers an effective way to make mortgage credit available to more people. USMI is ready to help build the future of homeownership. Learn more at www.usmi.org.