Op-Ed: No, The FHA Should Not Be Pushed to the Brink Again

By: Lindsey Johnson


Some hailed the Department of Housing and Urban Development’s annual report on the Federal Housing Administration’s financial status as evidence that the government mortgage insurance program should lower its fees. And they said that FHA should consider expanding its footprint in the housing finance market.

But HUD Secretary Ben Carson made clear that while FHA’s financial health has improved, it should “maintain its focus on providing access to mortgage financing to low- and moderate-income families that cannot be fulfilled through traditional underwriting.”

The FHA serves an important countercyclical role in the housing finance system; however, it is important that policymakers recognize that there is a vibrant conventional market that is able to serve many borrowers and prudently help them access affordable mortgage finance. Further, because FHA-backed mortgages protect 100% of the risk, expanding the FHA would mean expanding taxpayer exposure to that risk. This is simply not necessary.

Indeed, low down payment lending is critically important to the U.S. housing system. It gives many first-time home buyers access to the conventional mortgage market without requiring them to put a full 20% down. In the third quarter of 2019, nearly 80% of first-time homebuyers used these mortgages — 35% of which were backed by private mortgage insurance. With the private sector taking the first-loss risk exposure on these loans, the federal government, and thus taxpayers, are far more protected from mortgage credit risk.

The FHA-insured market and the conventional market should complement one another rather than compete. The conventional market — where the credit risk is backed by private capital — is well positioned to play a bigger role in facilitating access to affordable credit. It can do so without unnecessarily saddling the government or taxpayers with risk.

This better enables the FHA to focus on its mission of supporting those borrowers who do not have access to traditional financing — and to ensure it can play its countercyclical role through all market cycles.

In 2018, conventional loans with private MI helped more than one million low down payment borrowers — nearly 60% of which were first-time homebuyers and nearly 40% had incomes below $75,000. And in the first three quarters of 2019, nearly 47% of insured loans had private MI and the industry supported almost $275 billion in new originations. On the other hand, the FHA has over $1.2 trillion of outstanding risk exposure in 2019, according to the HUD report.

For borrowers, conventional low down payment mortgages with private MI are a good deal, because they are affordable despite a higher loan-to-value ratio and the insurance cancels once 20% equity is built. This results in direct savings for the borrower, compared to the FHA where premiums are typically paid for the life of the loan. Further, according to a recent analysis by the Urban Institute, loans with private MI were more affordable than loans backed by FHA for the majority of credit score and down payment cohorts for low down payment borrowers. And for the housing system these loans are a good deal because compared to FHA-backed mortgages, there is less risk exposure for taxpayers. Plus private mortgage insurers serve as a second set of eyes during the underwriting process to ensure that borrowers are set up for sustainable homeownership.

Instead of asking how FHA lending can be expanded the debate should revolve around prudently making low down payment mortgages in general more affordable and accessible to ensure risk is being managed appropriately. It can be done. Secretary Carson and other regulators have outlined in their recent reform plans ways to promote private capital supporting the housing finance system where possible.

Further the mortgage credit landscape is very different today than it was prefinancial crisis, largely due to new statutory restrictions of mortgage product features and federal regulation. For example, the Qualified Mortgage Rule provides the necessary safeguards for lending and underwriting. These safeguards, including measurable thresholds to assess a borrower’s ability-to-repay, have resulted in much better and safer mortgages being originated. In fact, foreclosure rates are at a 20-year low.

As regulators assess changes to mortgage underwriting requirements, including the expiration of the GSE patch in the QM Rule, these changes should be done in a coordinated manner with federal housing agencies by collaborating to create and implement a harmonized standard that can apply across the conventional and FHA mortgage markets alike to ensure a level playing field. Otherwise, the resulting regulatory patchwork could create arbitrage opportunities, lock some consumers out of the market due to higher costs, and merely shift, rather than reduce, the government’s exposure to mortgage credit risk.

Our housing regulators have a significant opportunity to strike the right balance to ensure that both access and risk are managed throughout the mortgage finance system. Private mortgage insurers understand this delicate balance and look forward to working with them to achieve sustainable levels for each.


National Mortgage News originally published USMI President Lindsey Johnson’s opinion piece, “No, the FHA should not be pushed to the brink again” on December 24. The piece was also published by American Banker.

Newsletter: December 2019

As the year draws to a close, the focus is on the end-of-year legislative and rulemaking deadlines—as well as looking at what’s ahead for housing in 2020. Earlier this month, the Urban Institute published an updated report that provides analysis on private mortgage insurance (MI) borrowers and the role private MI plays in reducing mortgage risk exposure. In November, the Federal Housing Finance Agency (FHFA) announced its plans to re-propose the Enterprise Capital Rule in 2020. In addition, Citizens Against Government Waste (CAGW) and National Taxpayers Union (NTU) released analysis of the Trump Administration’s Housing Finance Reform Plans, emphasizing the need to transition the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, out of conservatorship. It highlights the role that private capital can play in facilitating such a transition. The Senate also moved closer to filling a very important housing policy position at the Department of Housing and Urban Development (HUD) when Federal Housing Administration (FHA) Commissioner Brian Montgomery was approved by the Senate Banking Committee to serve as HUD’s Deputy Secretary. Finally, FHFA and HUD increased loan limits for mortgages acquired by the GSEs and insured by the FHA, respectively.

  • Urban Institute releases an update to its MI chart book. On December 4, the Urban Institute published an updated analysis of the MI market, highlighting both the role that MI has played in enabling homeownership, as well as the protection private MI offers lenders, the GSEs, and taxpayers. The report, which included national and state-specific data, highlighted the borrowers currently being served by private MI, noting these borrowers tend to have higher credit scores and lower loan-to-value (LTV) and debt-to-income (DTI) ratios than FHA borrowers. The report highlights the important role private MI plays in helping to ensure low- to moderate-income and first-time homebuyers have access to the conventional market. It details that private MI is more affordable than FHA-back loans for the majority of combinations of FICO score and LTV ratios of 96.5, 95, 90, and 85 percent. The report also found that private MI borrowers tend to have lower credit scores, higher LTV and DTI ratios, and are more likely to be first-time homebuyers than conventional borrowers without private MI. Importantly, GSE loans with private MI have lower loss severities than non-private MI GSE loans, despite their higher LTV ratios. In other words, private MI is highly effective in allowing more qualified borrowers enter the mortgage market and achieve homeownership, while significantly reducing losses to the GSEs, which in turn reduces taxpayers’ risk.
  • FHFA’s Enterprise Capital Rule. In mid-November, FHFA announced its plans to re-propose the Enterprise Capital Rule in 2020. Director Mark Calabria remarked, “the Capital Rule is one of the most important rules I will issue as Director. This rule will be re-proposed and finalized within a timeline fully consistent with ending the conservatorships. Requiring the Enterprises to build capital that can properly support their risk ensures that taxpayers will never be on the hook again during an economic downturn.” Speaking at an event hosted by the Federalist Society on Tuesday, Director Calabria indicated that the FHFA is targeting Q1 of 2020 to re-propose the capital rule.

    Originally introduced in 2018, the process of retaining capital at the GSEs is viewed as a critical first step to end their conservatorships. When FHFA first announced the plan in 2018, USMI submitted a comment letter stating it “supports meaningful and appropriate capital requirements for Fannie Mae and Freddie Mac and appreciates the FHFA for initiating this rulemaking process.” USMI agrees the rule is one of the most significant rules to be issued in that it will determine the future role of the GSEs, how private capital will be able to continue to support the conventional market to protect taxpayers, and importantly, the level of access and affordability of mortgage finance credit for consumers. USMI supports the FHFA working to re-propose and finalize a capital rule for the GSEs that strikes an appropriate balance between borrowers’ access to affordable mortgage finance and creates robust and countercyclical capital requirements that creates a transparent and level playing field, and that better insulates the GSEs and taxpayers from mortgage credit risk
  • CAGW and NTU released analysis of the Trump Administration’s Housing Finance Reform Plans. CAGW and NTU’s recent report offers a compelling argument in favor of enacting meaningful reforms at the GSEs to strengthen the nation’s housing finance system, concluding that “without comprehensive reform, taxpayers are likely to bail out the GSEs again in the future.” After analyzing the Treasury Department’s Housing Finance Reform Plan, CAGW and NTU believe that GSE reform should be guided by the following principles: 1) creating a sustainable, cautious path to recapitalization and release that minimizes systemic risk; 2) protecting taxpayers through stringent capital backstops and liquidity requirements; and 3) restricting mission creep and promoting private-sector competition.

    Further, the report outlines several regulatory changes needed to facilitate the GSEs’ transition out of conservatorship including among other things that the Consumer Financial Protection Bureau (CFPB) should allow the current Qualified Mortgage (QM) Rule, known as the “GSE Patch,” to be replaced by transparent and consistent rules that apply across the industry. “Conservatorship was never meant to last forever,” the report concludes. By implementing these changes, the Trump Administration, Congress, FHFA, Treasury, and HUD have the opportunity to reshape the mortgage market and, ultimately, safeguard American taxpayers.
  • Senate Banking Committee advances Brian Montgomery’s nomination to serve as HUD Deputy Secretary. On December 11, FHA Commissioner Brian Montgomery was approved by a bipartisan vote of 20-5 in the U.S. Senate Committee on Banking, Housing and Urban Affairs to serve as HUD’s Deputy Secretary. His nomination will now move on to the Senate for final confirmation. In a statement issued on October 8, USMI applauded Montgomery’s nomination and commended him for his extensive background and experience that will allow him to immediately begin work on the most important issues facing the housing finance system.
  • FHFA and HUD increase loan limits for 2020. On November 26, FHFA announced the maximum conforming loan limits for mortgages acquired by the GSEs in 2020. The baseline limits for 2020 will be $510,400 and the high-cost area limit will be $765,600 – this represents an approximate 5 percent increase from the 2019 loan limits. These changes mean that the maximum conforming loan limit will be high in 2020 in all but 43 counties in the country. On December 3, the FHA announced the 2020 county loan limits for single-family mortgages the agency insures and issued a Mortgagee Letter outlining the “2020 Nationwide Forward Mortgage Limits.” FHA sets the loan limits for most counties at 115 percent of the country’s median home price and, for 2020, set the “floor” for low-cost areas at $331,760 (65 percent of the national conforming limit) and the “ceiling” for high-cost areas at $765,600 (150 percent of the national conforming limit) for one-unit properties.