Month: October 2020

Newsletter: October 2020

Posted on by dcadmin

October has been a busy month in housing finance. Last week, USMI issued a new report on the strength and resiliency of the private mortgage insurance (MI) industry. The report highlights regulatory and industry-led reforms since the 2008 financial crisis which have enabled it to better serve homebuyers and lenders. It also continued to urge the Federal Housing Finance Agency (FHFA) to develop policies for the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, to promote a more stable and equitable housing finance system post-conservatorship.  While all eyes are on the election this week, below are other important issues USMI is tracking:

New USMI Report Released on MI Industry
USMI Blog on FHFA Re-Proposed Enterprise Regulatory Capital Framework (ERCF) and Strategic Plan
USMI’s Comments on FHFA Strategic Plan
FHFA Proposed Rule for New Enterprise Products and Activities
Urban Institute Releases October 2020 Chartbook
USMI President on “Main St. Finance” Podcast
ICYMI: CFPB Extends QM Patch

  • New USMI Report Released on MI Industry. Last week, USMI released a new report titled, “Private Mortgage Insurance: Stronger and More Resilient.” The report highlights significant regulatory and industry-led reforms taken since the 2008 financial crisis to improve and strengthen the role of private MI in the nation’s housing finance system. It analyzes the various steps the industry and regulators have undertaken and continue to take to ensure sustainable mortgage credit through all market cycles and to better serve low down payment borrowers in the conventional market, especially during critical economic times like these.

    Upon the report’s release, USMI President Lindsey Johnson said, “Though private mortgage insurers have been a crucial part of the housing finance system for more than 60 years, this is definitely ‘not your father’s’ MI industry.  Enhanced capital and operational standards, as well as increased active management of mortgage credit risk, including through the distribution of credit risk to the global reinsurance and capital markets, has put the industry in a stronger position.” She added, “These enhancements will enable the industry to be a more stabilizing force through different housing cycles — including the current COVID-19 crisis — which greatly benefits the GSEs and taxpayers and enhances the conventional mortgage finance system.”

    The report details several of the major enhancements to the industry in the last decade, including: Private Mortgage Insurer Eligibility Requirements (PMIERs); New Master Policy; Rescission Relief Principles; and MI Credit Risk Transfer (MI-CRT) Structures. The report provides an update on the growing MI-CRT market, noting that as of October 2020, private MI companies have transferred nearly $41.4 billion in risk on approximately $1.8 trillion of insurance-in-force (IIF) since 2015 using 23 reinsurance deals and 30 insurance-linked note (ILN) transactions.
  • USMI Blog on FHFA Re-Proposed ERCF and Strategic Plan. This week, USMI published a blog titled, “Capital Alone is Not Comprehensive Housing Finance Reform: More Administrative Actions are Required & FHFA’s Re-Proposed Capital Framework Should be Modified.” The piece emphasizes the importance of the appropriate level of capital for Fannie Mae and Freddie Mac, but also the need for additional reforms prior to the GSEs’ exit from conservatorship. FHFA’s re-proposed ERCF will guide FHFA as it works to release the GSEs from conservatorship. As proposed, the ERCF would require the GSEs to hold about 10 times their current capital levels ($243 billion versus $28 billion, respectively, as of Q2 2020) and roughly five times their projected losses under a severe economic downturn.  USMI submitted its comment letter on the re-proposed ERCF in August 2020 and published an executive summary as well.

    USMI agrees that a robust and appropriately tailored capital standard for the GSEs is necessary and should strike the right balance to ensure consumers’ continued access to affordable mortgage credit while also protecting taxpayers. However, the ERCF has several overly conservative elements, such as the treatment of private MI and CRT transactions, as well as numerous non-risk adjusted capital buffers. Instead, USMI suggests FHFA should reduce or eliminate non-risk based elements and build the capital rule around an insurance framework, given the GSEs’ core function is a guaranty business. The framework should ultimately ensure adequate capital for the risks taken by the GSEs, but should not be set to an arbitrarily high level that puts homeownership out of reach for many American families.
  • USMI’s Comments on FHFA’s Strategic Plan. USMI’s blog also discusses USMI’s recommendations for FHFA’s Strategic Plan for Fiscal Years 2021-2024. USMI welcomes FHFA’s work on a post-conservatorship capital framework, but notes that it is important to recognize that capital alone is not comprehensive GSE reform, and additional actions are necessary to reform the housing finance system and put it on more stable footing for the long-term.Earlier this month, USMI submitted a comment letter to FHFA on its Strategic Plan. In its comment, USMI recommended that FHFA take further steps to reduce the GSEs’ risk exposure, level the playing field, and increase transparency around the GSEs’ pricing and business operations. USMI called for FHFA to take five specific actions in advance of the GSEs’ exit from conservatorship:
    1. Limit the GSEs’ activities to those necessary to fulfill their intended role of facilitating a liquid secondary market for mortgages, preserving the “bright line” separation between the primary and secondary mortgage markets;
    2. Increase transparency around the GSEs’ operations, credit decisioning, technologies, and role in the housing finance system;
    3. Require a “notice and comment period” process and prior approval for new products and activities at the GSEs;
    4. Require that counterparty standards be set by or in coordination with FHFA, and not just the GSEs; and
    5. Promote a clear, consistent, and coordinated housing finance system.
  • FHFA Proposed Rule for New Enterprise Products and Activities. Last week, FHFA released a proposed rule concerning “Prior Approval for Enterprise Products” that would require the GSEs to provide notice to FHFA before undertaking a new activity and obtain prior approval from FHFA before offering a new product. USMI welcomes Director Calabria’s effort to establish a more transparent and objective process for the development and implementation of new GSE products and activities. USMI further believes that the GSEs should only introduce new products, activities, and pilots when there is clear and compelling evidence that the GSEs are needed to fill a market void that the private market cannot meet. This rule would allow a rigorous review of the GSEs’ efforts and ensure that the GSEs’ activities are not duplicative nor unfairly competitive with the primary and private market participants.

    In response to the release of the proposed rule, the National Taxpayers Union (NTU) published a blog  titled, “Latest GSE Rule Protects Taxpayers and Businesses from Government Overreach.” NTU praised the rule as it would “help to ensure that the GSEs are neither crowding out private market competitors nor expanding obligations back-stopped by taxpayers.” NTU said the proposed rule is a “constructive step that protects taxpayers and private businesses from government overreach.”
  • Urban Institute Releases October 2020 Chartbook. This week, the Urban Institute published its October chartbook on housing finance. Included in this comprehensive analysis of industry data are updates on the MI industry, beginning on page 32. The Chartbook highlights that “Mortgage insurance activity via the FHA, VA and private insurers increased from $197 billion in Q2 2019 to $327 billion in Q2 2020, a 57.4 percent increase.  In the second quarter of 2020, private mortgage insurance written increased by $51.3 billion, FHA increased by $17.2 billion and VA increased by $56.4 billion relative to Q2 2019.”
  • USMI President on “Main St. Finance” Podcast. USMI’s members work to help low down payment borrowers have access to affordable mortgage credit. To share that message, USMI President Lindsey Johnson joined the “Main St. Finance” podcast to discuss the 20 percent down payment myth and the different low down payment options available to borrowers. Specifically, she explained how private MI bridges the down payment gap to help home-ready buyers get in their home sooner while also protecting lenders, the GSEs, and taxpayers from mortgage credit-related losses. Listen to podcast here.
  • ICYMI: CFPB Extends GSE Patch. On October 22, the Consumer Financial Protection Bureau (CFPB) issued a final rule to extend the GSE Patch until the CFPB implements a new General Qualified Mortgage (QM) definition. USMI previously submitted a comment letter on the Bureau’s proposed updates to the General QM definition, as well as a comment letter which recommended the CFPB set the sunset date for the GSE Patch to be at least six months after the effective date of the General QM definition final rule.

Blog: Capital Alone Is Not Comprehensive Housing Finance Reform: More Administrative Actions are Required & FHFA’s Re-Proposed Capital Framework Should be Modified

Posted on by dcadmin

Since Fannie Mae and Freddie Mac (the “GSEs”) entered conservatorship in 2008, federal policymakers and industry professionals have debated their future role in the housing finance system, as well as what reforms are appropriate and necessary to put the GSEs on stable footing for the long term.

Twelve years later, the Federal Housing Finance Agency (FHFA) is taking steps to release the GSEs from conservatorship. To that end, FHFA has proposed an Enterprise Regulatory Capital Framework (ERCF) intended to prevent future failures by requiring the GSEs to hold much more capital. In fact, the re-proposed ERCF would require the GSEs to hold about 10 times their current capital levels ($243 billion versus $28 billion, respectively, as of Q2 2020) and roughly five times their projected losses under the most severe economic downturn.

Importantly, the proposed framework supposes that the GSEs will return to their pre-conservatorship status in the housing finance system—quasi-government companies—with congressional charters, missions, and mandates, yet private companies with profit objectives. FHFA’s re-proposed capital framework is intended to help the GSEs avoid taxpayer bailouts by building and maintaining large enough capital reserves to withstand future downturns.

USMI agrees that a robust and appropriately tailored capital standard for the GSEs is necessary and should strike the right balance to ensure consumers maintain access to affordable mortgage credit while also protecting taxpayers. The best way to achieve these objectives is to have a standard that reflects the business models of the GSEs, whose primary business is a guaranty business, and that is akin to an insurance framework. Further, the capital framework should be objectively risk-based, and the quantity and quality of capital requirements should be completely transparent and analytically justified.

In its comment letter to FHFA on its 2020 proposed rule, USMI identified key issues with the re-proposed ERCF and provided recommendations for ensuring greater balance between the two aforementioned objectives. (An executive summary of USMI’s observations and recommendations is available here).  While actions taken during conservatorship have strengthened the GSEs, it is clear that additional reforms are necessary to improve the GSEs’ operations in advance of their exit from conservatorship. USMI strongly urges FHFA to turn its attention to critical reforms that incentivize the prudent management of mortgage credit risk and ensure access to affordable and sustainable mortgages for home-ready consumers.

INCREASE, NOT DECREASE THE USE OF PRIVATE CAPITAL

Proposed Capital Rule Disincentivizes Critical Loss Protection and Beneficial Risk Transfer

While we support strong GSE balance sheets to best serve borrowers and protect taxpayers from mortgage credit risk, certain elements of the re-proposed rule would promote risk consolidation at the GSEs and disincentivize the distribution of risk.  The ERCF should incentivize the increased transfer of mortgage credit risk to private capital where possible. Unfortunately, as many stated in their comment letters to the proposed ERCF, the reduced capital benefit for private mortgage insurance (MI), punitive treatment of credit risk transfers (CRT), and proposed floors on mortgage exposures would likely reduce the GSEs’ ability or willingness to transfer risk to other sources of private capital.

Until Congress enacts comprehensive housing finance reform and/or gives FHFA the authority to charter additional GSEs, it is imperative that the concentration of mortgage credit risk at Fannie Mae and Freddie Mac be transferred to highly regulated counterparties to appropriately underwrite, actively manage and hold capital against.  One way FHFA can accomplish this objective is to provide the appropriate capital benefit to the GSEs for transferring risk—based on an historical analysis of the capital credit that should be given to any such counterparty or risk transfer. To ensure that credit risk is transferred to strong counterparties, FHFA—rather than the GSEs—should establish and update robust operational and capital requirements for GSE counterparties, as necessary. Transparent and objective standards will promote a level playing field and ensure that private market participants can perform an important role in de-risking the GSEs.  Private MI and the GSEs’ CRT programs are important tools to bring private capital into the housing finance system and any final rule on GSE capital requirements should recognize their risk-reducing benefits.

However, it seems that in addressing some of the structural weaknesses of CRT, the proverbial “baby was thrown out with the bathwater” by the current proposed rule. Instead, to fully assess the weaknesses and determine the appropriate capital relief that the GSEs should receive for different forms of CRT, FHFA should publish a transparent model that capital markets executions and reinsurance transactions can be modeled against.  This will ensure that weaknesses are properly addressed but will also maintain integrity and increase transparency and consistency in FHFA and the private market’s assessment of and capital benefit for CRT and will better ensure a viable CRT market going forward.

Balance Capital Requirements with Access to Sustainable Mortgage Finance Credit

Importantly, the re-proposed rule, if implemented in its current form, could push homeownership out of reach for many Americans –particularly minority and first-time homebuyers –or it could leave many borrowers with the lone option of obtaining a mortgage backed by the Federal Housing Administration (FHA). According to the Urban Institute[1] and the GSEs themselves,[2] the capital proposal would result in higher costs for borrowers and less mortgage credit availability, as higher capital requirements would necessitate higher profits to support the capital.  For the GSEs, this will mean higher Guarantee Fees (G-Fees), raising the cost of homeownership for millions, with a disproportionate negative impact on lower wealth and traditionally underserved borrowers.  In light of these increased costs, many of these borrowers, would migrate to the FHA market.

The proposed ERCF has a number of overly conservative elements, as well as numerous examples of non-risk aspects.  Instead, FHFA should reduce or eliminate non-risk based elements and establish the capital rule around an insurance framework, given the GSEs’ core guaranty business is to ensure the adequate capital for the risks taken by the GSEs, but not an arbitrarily high level of capital that puts homeownership out of reach for many American families.

THE NEXT STEPS FOR STRENGTHENING THE HOUSING FINANCE SYSTEM

FHFA’s work on a post-conservatorship capital framework is a welcome development. However, it is important to recognize that capital alone is not comprehensive GSE reform

In order to put the housing finance system on a more sustainable path and to best serve consumers and taxpayers, it is imperative that FHFA implement reforms beyond increasing capital before the GSEs exit conservatorship. In September, FHFA released its “Strategic Plan: Fiscal Years 2021-2024,”outlining goals to fulfill its statutory duties as both regulator and conservator of the GSEs. While a primary goal of the plan is to take actions to support the GSEs’ recapitalization and exit from conservatorship, FHFA invited comments on the “mile markers,” or additional reforms or thresholds to be met by the GSEs and/or FHFA prior to the GSEs’ exit from conservatorship.  

It is imperative that FHFA take steps to further reduce the GSEs’ risk exposure, level the playing field, and increase transparency around the GSEs’ pricing and business operations. As recommended in USMI’s comment letter on the Strategic Plan to FHFA, the agency should take the following actions to strengthen the housing finance system prior to the GSEs’ release from conservatorship:

  1. Limit the GSEs’ activities to those necessary to fulfill their intended role of facilitating a liquid secondary market for mortgages, preserving the “bright line” separation between the primary and secondary mortgage markets. Pursuant to their unique congressional charters, the GSEs are required to restrict their activities to secondary market functions. FHFA should implement regulatory guardrails to ensure that the GSEs do not encroach on primary market activities and do not disintermediate private market participants.
  2. Increase transparency around the GSEs’ operations, credit decisioning, technologies, and role in the housing finance system. Absent proper guardrails and transparency for market participants, the GSEs’ innovation can further hardwire their technologies and systems into the housing finance system.  Though technology can lead to positive transformation, often these technologies make critical underwriting or credit decisioning less opaque and more centralized in the GSEs.  Further, this additional entrenchment complicates the prospects and logistics of enacting permanent structural reforms.
  3. Require a “notice and comment period” process and prior approval for new products and activities at the GSEs. While in conservatorship, the GSEs have rolled out, with little to no transparency, pilots and programs which have often represented expansions into activities long considered to be functions of the primary mortgage market. Recently, FHFA proposed a new rule that would establish a more transparent and objective process for the development and approval of new GSE products and activities. USMI welcomes these efforts and urges FHFA to implement an approval process that facilitates robust feedback from interested stakeholders and ensures that any new products and activities support the GSEs’ explicit public policy objectives, support and do not compete with other market participants on an unlevel playing field, and comply with their charters.  While USMI looks forward to reviewing and commenting on all aspects of the proposed rule, it is a much-needed step in the right direction as it relates FHFA’s oversight of the GSEs.
  4. Require that counterparty standards be set by or in coordination with FHFA, and not just the GSEs. FHFA should promulgate strong risk-based capital and operational standards for GSE counterparties, similar to what was established through the development of the Private Mortgage Insurers Eligibility Requirements (PMIERs). Greater transparency and oversight of the GSEs and their counterparties should be conducted in a manner to increase transparency, reduce conflicts of interest, and to ensure the GSEs cannot arbitrarily pick winners and losers or promote opportunities to arbitrage the rules.
  5. Promote a clear, consistent, and coordinated housing finance system. It is paramount for FHFA to work with other federal regulators, including the U.S. Department of Housing and Urban Development (HUD) and Consumer Financial Protection Bureau (CFPB), to reduce—not merely shift—credit risk in the housing finance system. A coordinated and clearly articulated federal housing policy will ensure that American consumers are best served by housing market participants and that the federal government is adequately protected from mortgage credit risk related losses.

[1] The Urban Institute estimates that mortgage rates would increase 15-20 bps while in conservatorship and 30-35 bps if they are released. J. Parrott, B. Ryan, and M. Zandi, “FHFA’s Capital Rule Is A Step Backward” (July 2020). Available at https://www.urban.org/sites/default/files/publication/102595/fhfa-capital-rule-is-a-step-backward_0.pdf.

[2] Fannie Mae and Freddie Mac’s comments to the FHFA on the proposed Enterprise Regulatory Capital Framework noted that the capital requirements could increase guarantee fees by 20 bps and 15-35 bps, respectively. Available at https://www.fhfa.gov//SupervisionRegulation/Rules/Pages/Comment-Detail.aspx?CommentId=15605 and https://www.fhfa.gov//SupervisionRegulation/Rules/Pages/Comment-Detail.aspx?CommentId=15606.

Press Release: New Report, “Private Mortgage Insurance: Stronger and More Resilient”

Posted on by dcadmin

Over 10 Years of Reforms and Continued Evolution Make Private Mortgage Insurers Stronger and More Resilient

Industry has facilitated affordable, low down payment mortgages for over 33 million households, contributing to a more stable housing finance market

WASHINGTON — U.S. Mortgage Insurers (USMI), the association representing the nation’s leading private mortgage insurance (MI) companies, today released a report that highlights the many regulatory and industry-led reforms taken since the 2008 financial crisis to improve and strengthen the role of private MI in the nation’s housing finance system. The report, “Private Mortgage Insurance: Stronger and More Resilient,” analyzes the various steps the industry and regulators undertook and continue to take to ensure sustainable mortgage credit through all market cycles and to better serve low down payment borrowers in the conventional market, especially during critical times such as the present.
 
“Though private mortgage insurers have been a crucial part of the housing finance system for more than 60 years, this is definitely ‘not your father’s’ MI industry. Enhanced capital and operational standards, as well as increased active management of mortgage credit risk, including through the distribution of credit risk to the global reinsurance and capital markets,  has put the industry in a stronger position,” said Lindsey Johnson, President of USMI. “These enhancements will enable the industry to be a more stabilizing force through different housing cycles — including the current COVID-19 crisis — which greatly benefits the GSEs and taxpayers and enhances the conventional mortgage finance system.”  
 
The report also highlights the steps the industry has taken since the beginning of the pandemic to support the federal government foreclosure prevention programs, including the announcements made by Fannie Mae and Freddie Mac regarding forbearance programs and other mortgage relief available to support borrowers impacted by COVID-19. USMI members have focused their efforts on helping borrowers remain in their homes by supporting their lender customers during these challenging times.
 
Among the enhancements to the industry in the last several years, the report outlines and analyzes the following:

  • Private Mortgage Insurer Eligibility Requirements (PMIERs) – Adopted in 2015 and updated in 2018 and 2020, PMIERs nearly doubled the amount of capital each mortgage insurer is required to hold. USMI members collectively hold more than $5.1 billion in excess of these requirements.
  • New Master Policy – Updated terms and conditions from mortgage insurers for lenders, which provide lenders with greater clarity pertaining to coverage.
  • Rescission Relief Principles – First published in 2013 and updated in 2017, these principles allow MIs to offer day-one certainty to lenders of coverage, including automatic relief after 36 timely payments.
  • MI Credit Risk Transfer (MI-CRT) Structures – Private MI companies have transferred $41.4 billion in risk on over $1.8 trillion of insurance- in-force (IIF) since 2015—through both reinsurance and insurance-linked notes.

Through the programmatic execution of MI-CRT transactions, the industry continues to transition the business into an aggregate-manage and distribute model for mortgage credit risk.  The implementation and expansion of MI-CRT programs have demonstrated the industry’s ability to tap multiple sources of capital to support new business and actively manage and distribute risk. 
 
Since 1957, the MI industry has served the U.S. government and taxpayers as an effective and resilient form of private capital, standing as the first layer of protection against risk and mortgage defaults. Importantly, MI has enabled affordable, low down payment homeownership for more than 33 million people. In 2019 alone, more than 1.3 million borrowers purchased or refinanced a loan with private MI, accounting for nearly $385 billion in new mortgages.  

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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

Strength of MI Report

Posted on by dcadmin

USMI’s report, “Private Mortgage Insurance: Stronger and More Resilient,” highlights the many regulatory and industry-led reforms taken over the last decade to improve and strengthen the role of private mortgage insurance (MI) in the nation’s housing finance system. The report analyzes the various regulatory enhancements and the industry-led initiatives that private MIs have taken and continue to take to ensure sustainable mortgage credit through all market cycles and to better serve low down payment borrowers in the conventional market, especially during critical economic times. Click below to read the report.

The report also highlights the steps the industry has taken since the beginning of the COVID-19 pandemic to support the federal government foreclosure prevention programs, including the announcements made by Fannie Mae and Freddie Mac regarding forbearance programs and other mortgage relief available to support borrowers impacted by COVID-19.  USMI members have focused their efforts on helping borrowers remain in their homes by supporting their lender customers during these challenging times.

Among the enhancements to the industry in the last several years, the report outlines and analyzes the following:

  • Private Mortgage Insurer Eligibility Requirements (PMIERs) – Adopted in 2015 and updated in 2018 and 2020, PMIERs nearly doubled the amount of capital each mortgage insurer is required to hold. USMI members collectively hold more than $5.1 billion in excess of these requirements.
  • New Master Policy – Updated terms and conditions from mortgage insurers for lenders, which provide lenders with greater clarity pertaining to coverage.
  • Rescission Relief Principles – First published in 2013 and updated in 2017, these principles allow MIs to offer day-one certainty to lenders of coverage, including automatic relief after 36 timely payments.
  • MI Credit Risk Transfer (MI-CRT) Structures – Private MI companies have transferred $41.4 billion in risk on over $1.8 trillion of insurance- in-force (IIF) since 2015—through both reinsurance and insurance-linked notes.

Download the full report here.

Letter: Comments on FHFA Strategic Plan: Fiscal Years 2021-2024

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Dr. Mark A. Calabria
Director
Federal Housing Finance Agency
Constitution Center
400 7th Street SW
Washington, DC 20219

Dear Director Calabria:

U.S. Mortgage Insurers (USMI) represents America’s leading providers of private mortgage insurance (MI) and our members are dedicated to a strong housing finance system backed by private capital that enables access to prudent and sustainable mortgage finance. The MI industry has more than 60 years of expertise in underwriting and actively managing mortgage credit risk to balance access to affordable credit with protecting Fannie Mae and Freddie Mac (the GSEs) and the American taxpayer from mortgage credit-related losses. During that time, the MI industry helped more than 33 million households achieve sustainable homeownership, including more than 1.3 million in the past year alone.

On September 22, 2020 the Federal Housing Finance Agency (FHFA) released its “Strategic Plan: Fiscal Years 2021-2024” (Strategic Plan) that establishes goals for FHFA to fulfill its statutory duties as both regulator and conservator of the GSEs. USMI appreciates the opportunity to submit input on the Strategic Plan and provide feedback on the framework and requirements for forthcoming FHFA actions. At a high level, USMI commends FHFA for formalizing the establishment of its new strategic goals to: (1) ensure safe and sound regulated entities through world-class supervision; (2) foster competitive, liquid, efficient, and resilient (CLEAR) national housing finance markets; and (3) position the FHFA as a model of operational excellence by strengthening its workforce and infrastructure. USMI supports these goals and they are consistent with the observations and recommendations outlined in our October 2018 administrative reform report.

A primary goal of the Strategic Plan is to take actions that strengthen the operations and oversight of the GSEs to support their exit from conservatorship. This is consistent with the Administration’s March 2019 “Memorandum on Federal Housing Finance Reform,” which called on the U.S. Department of the Treasury (Treasury) to develop a plan to “End[] the conservatorships of the GSEs upon the completion of specified reforms” and Treasury’s subsequent “Housing Reform Plan” which stated that “In parallel with recapitalizing the GSEs, FHFA should begin the process of ending the GSEs’ conservatorships.” While it will ultimately fall to Congress to complete the difficult work of making permanent and structural changes to the housing finance system, despite a number of legislative proposals over the past 12 years, Congress has yet to pass comprehensive reform. Though congressional action is still needed to provide for the necessary structural reforms, including a transparent and paid-for explicit guarantee of the GSEs’ mortgage-backed securities, the FHFA and Administration can take certain actions to further reduce taxpayer risk exposure, level the playing field, and provide greater transparency regarding GSE pricing and practices—ultimately to put the GSEs and the housing finance system on more stable footing going forward.

Over the summer, the FHFA re-proposed a post-conservatorship capital framework for the GSEs, which you have routinely characterized as the most important rulemaking that will occur during your time as Director. As indicated in our comment letter, USMI urges FHFA to adopt appropriate capital standards for the GSEs and believes that a well calibrated capital framework is a critical reform. However we also strongly believe that additional reforms are necessary, including reforms that reflect the lessons learned during and since the 2008 financial crisis, reduce the GSEs’ duopolistic market dominance, and create long-term safety and soundness in the housing finance system. These reforms, if done correctly, will help to reduce taxpayer risk exposure and ensure that home-ready Americans continue to have sustainable access to prudent mortgage finance credit. Further, actions taken by the FHFA and Administration should help facilitate, not inhibit, Congress’ ability to complete comprehensive housing finance.

As Director of the FHFA, you have previously indicated that the agency “will continue to engage with Treasury to develop a responsible plan to end the conservatorships—with a clear road map and mile markers—and to adjust the Treasury share agreements accordingly.” We are pleased that there are specific “mile markers” and reforms that will have to be met prior to ending the conservatorships of the GSEs. These reforms and mile markers should be met before the GSEs exit conservatorship and are mostly possible if done by the Director of FHFA in his role as conservator. You have stated on a number of occasions your desire and intent to improve competition in the marketplace with the GSEs, noting that “[c]ompetition lowers prices, improves quality, and drives innovation…and ensure[s] no institution is ‘too big to fail.’” However, even if Congress were to provide FHFA the authority to grant charters to new guarantors, for competition to ever exist in the marketplace, the GSEs’ significant market advantages would have to be addressed. Over the decades—and particularly during their more than 12 years in conservatorship—the GSEs have made significant investments in proprietary systems and technologies that have made the mortgage finance system even more reliant on the GSEs. Addressing these vast advantages and implementing these reforms is necessary ahead of allowing the GSEs to build capital and exit conservatorship, where they would otherwise be able to leverage their existing capital and operational advantages to maintain their market dominance.

During conservatorship, stakeholders across the ideological spectrum have put forth a multitude of proposals and recommendations on housing finance reform. While they differ on various details, the proposals and recommendations have a critical similarity among them—they generally recognize that the GSEs should not be recapitalized and released before certain necessary meaningful reforms are completed and made permanent. Further, these proposals also include many common features for what should be considered “mile markers” to be met in advance of ending the net-worth sweep and ahead of the GSEs retaining capital. To varying degrees, many of the leading legislative and Administrative proposals for GSE reform have leaned on a utility-like secondary mortgage market function for the GSEs to reduce their current duopoly and market power in the mortgage finance system. Nearly all such proposals call for capping the GSEs’ rates of return, limiting their scope of activities to secondary market functions, and providing open and transparent access to the GSEs’ data, pricing, and technologies for private market participants, policymakers, and consumers. As to Congress, recent legislative proposals envision a role for the GSEs in a future housing system with an explicit government guarantee at the security level, call for the GSEs to ensure access for smaller lenders, and include transparent affordable housing requirements. These proposals signify that Congress feels there are critical functions currently imbedded in the GSEs and deems these functions/features necessary in a future housing finance system—either within the GSEs or placed in a separate utility or public exchange.

Ultimately, we believe that any actions taken by the Administration should seek to further four key policy objectives: (1) maintain what works in the current system; (2) further reduce taxpayer risk; (3) level the playing field between the GSEs and private market participants; and (4) provide greater transparency regarding the GSEs’ pricing and business practices. At a minimum, prior to the GSEs’ release from conservatorship, USMI urges FHFA to take the following administrative actions to achieve the above stated policy objectives:

  1. Limit the GSEs’ activities to only those necessary for the GSEs to fulfill their intended role of facilitating a liquid secondary market for mortgages, preserving a bright line separation between primary and secondary market activities.

    Objective 2.1 of the Strategic Plan calls on the FHFA to “ensure the activities of the regulated entities stay within the boundaries of their charters and appropriately respond to market events and downturns.” USMI strongly supports policies and supervision that preserve the “bright line” separation between the primary and secondary mortgage markets. It is imperative that the GSEs’ activities be limited to the secondary mortgage market, as stipulated by their congressional charters which explicitly state that their purposes are to “provide stability in the secondary market for residential mortgages; to respond appropriately to the private capital market; to provide ongoing assistance to the secondary market for residential mortgages…; and to promote access to mortgage credit throughout the Nation.” Before the GSEs are released from conservatorship, FHFA should use its authority to implement regulatory guardrails to ensure the GSEs do not encroach on primary market activities and do not disintermediate private market participants. Infringements of the longstanding bright line serve only to increase the GSEs’ market dominance and diminish the role that private capital plays in the housing finance system. For instance, the selection of loan-level credit enhancement has been a function of the primary mortgage market for more than 60 years and it is critical that it remains as such going forward to ensure that a vibrant, competitive private MI market is maintained to benefit taxpayers and consumers, and to prevent greater entrenchment of the GSEs.
  2. Increase transparency around the GSEs’ operations, credit decisioning, technologies, and role in the housing finance system.

    Implementing elements of a utility-like secondary market function for the GSEs, including transparency around their data, technology, and pricing, are appropriate guardrails that can help ensure the GSEs’ activities are within the bounds of their charters. Further, initiatives and technologies at the GSEs, such as those that seek to reduce the use of appraisals for purposes of assessing collateral during the underwriting process, can dramatically increase risk in the mortgage finance system if not done with transparency and in collaboration with other market stakeholders. Innovation, without proper guardrails and transparency, can further hardwire the GSEs’ automated underwriting systems (AUSs) into the broader housing finance system and complicate the prospects and logistics of enacting permanent structural reforms.
  3. Require a “notice and comment period” process and prior approval of new products and activities.

    During their 12 years in conservatorship, the GSEs have developed and introduced programs, products, and pilots with little to no transparency, often representing expansions into areas of the mortgage finance system considered to be functions of the primary mortgage market. This includes pilots for guaranteeing loans for single-family rentals, financing a select group of large non-banks to support mortgage servicing operations, executing lender risk sharing credit risk transfer (CRT) transactions, and utilizing less regulated and capitalized forms of credit enhancement – Fannie Mae’s “Enterprise-Paid Mortgage Insurance” (EPMI) and Freddie Mac’s “Integrated Mortgage Insurance” (IMAGIN). These pilots were introduced into the market without transparency for stakeholders and without a comment period to receive industry input on both the need for the pilots and recommendations to improve their operations. In some cases, they were only made available to a select group of industry participants—generally at the sole discretion of the GSEs, thereby picking winners and losers among industry participants. More recently, FHFA has directed the GSEs to end some of these pilots, and has indicated it plans to release a Request for Input (RFI) or Notice of Proposed Rulemaking (NPR) regarding the prior approval of new products and programs at the GSEs. USMI strongly supports a regulatory mechanism to exercise greater scrutiny of new GSE activities to ensure they support the GSEs’ explicit public policy objectives and comply with their charters. New products, activities, and pilots should only be allowed when there is clear and compelling evidence that the GSEs are needed to fill a market void that the private market cannot meet. A robust approval process that complies with the Administrative Procedure Act (APA) and provides for input from market participants and stakeholders will help ensure that private capital plays a significant role in the mortgage market and prevent the GSEs from being further entrenched in the housing finance system.
  4. Require that counterparty standards be set by the FHFA.

    Objective 2.1 of the Strategic Plan also calls on the FHFA to “establish standards for sellers, servicers, and counterparties to the regulated entities that strengthen the overall function and resiliency of the mortgage markets.” Private MIs are one of the only counterparties that have rigorous capital and operational standards, the Private Mortgage Insurer Eligibility Requirements (PMIERs), set by the GSEs and approved by FHFA, which were finalized through a public comment process. MIs must comply with the PMIERs standards in order to insure loans guaranteed by the GSEs. PMIERs ensure MI counterparty creditworthiness, as well as providing minimum standards for capital, operations, procedures, conflicts of interest, and other controls. USMI supports the FHFA promulgating strong risk-based capital and operational standards for all credit enhancement providers to ensure the availability of first-loss, loan-level credit enhancement across market cycles.

    The Administration has an opportunity to promote greater transparency and oversight of the GSEs and their counterparties and to correct what has proven to be at times a conflicting role that the GSEs play by both setting standards for market participants and then competing against these same private market participants. Lenders and other market participants should feel confident that they can access the secondary market on a level playing field with their competitors, based on clear and transparent standards. While diminished under a more utility-like system, there will still be a conflict for the GSEs to set counterparty standards, as there will continue to be opportunities to arbitrage the rules to compete with the private market and/or to pick winners and losers in the marketplace. A further post-conservatorship complication is that the GSEs may not continue to collaborate on PMIERs updates and the existence of two competing eligibility standards could cause market arbitrage opportunities and market distortions. Therefore, FHFA, under its authority and responsibility as regulator, should remain intently engaged in the development and approval of PMIERs. It is also important that the FHFA create transparent and consistent/comparable standards that promote a level playing field across counterparties.

    Further, consistent with nearly all other federal financial regulatory regimes, the FHFA as a prudential regulator of the GSEs should supervise the GSEs’ risk management processes and financial health. FHFA should use its regulatory authority whenever possible (as opposed to its authority as conservator) to minimize regulatory arbitrage by having a coordinated and consistent oversight approach.
  5. Promote a clear, consistent, and coordinated housing finance system.

    Finally, actions taken by FHFA should increase transparency and consistency, and should reduce, not merely shift, mortgage credit risk in the housing finance system. To accomplish this, the FHFA should work closely with other federal regulators to implement a transparent and coordinated housing policy that facilitates access to credit, promotes prudent mortgage underwriting, and creates a level playing field. Robust coordination between the FHFA, U.S. Department of Housing and Urban Development (HUD), and Consumer Financial Protection Bureau (CFPB) will ensure that borrowers are best served by housing market participants and that the federal government, and therefore American taxpayers, are adequately protected from losses related to mortgage credit risk. Federal policy should clarify which borrowers should be served by the GSE backed market and which are better served by the Federal Housing Administration (FHA). This is consistent with Treasury’s “Housing Reform Plan, which stated that “FHFA and HUD should develop and implement a specific understanding consistent with these defined roles for the GSEs and the FHA so as to avoid duplication of Government support.” Importantly, the GSEs have demonstrated that first-time homebuyers and borrowers with low down payments can effectively be supported by the conventional market. The GSEs and MIs have a long history of facilitating access to affordable and prudently unwritten low down payment mortgages, and conventional loans with private MI have been the preferred option for low down payment borrowers for every year since 2016. These home-ready borrowers should have mortgage options and not be categorically restricted to government-insured programs such as the FHA.

    A primary aspect of promoting a coordinated housing finance system is that the Administration, and FHFA specifically, should advance policies that promote borrowers being served by the conventional market, by private capital, where possible. As stated in our comment letter on the re-proposed Enterprise Regulatory Capital Framework, USMI strongly encourages FHFA to promote private capital standing in front of the GSEs, including through loan-level first-loss protection through entities that can actively manage mortgage credit risk, such as private MIs. Further, the Administration could encourage or require these private entities to disperse credit risk, similar to how private MIs currently operate and use the reinsurance and capital markets to further distribute mortgage credit risk to diverse global sources of capital.

A well-functioning housing finance system should provide consistent, affordable credit to borrowers across the nation and through all parts of the credit cycle without putting taxpayers at undue risk. Fixing our nation’s housing finance system and putting it on a sustainable path is the last piece of unfinished business following the 2008 financial crisis. We urge the FHFA and Administration to pursue the reforms enumerated above to ensure greater taxpayer protection and a more level playing field that enables a more transparent housing finance system and promotes sustainable access and affordability.

Sincerely,

Lindsey D. Johnson
President
U.S. Mortgage Insurers

View the letter as a PDF.