Press Release: Comment Letter on FHFA’s NPR on “Amendments to the Enterprise Regulatory Capital Framework Rule”

WASHINGTON — U.S. Mortgage Insurers (USMI), the association representing the nation’s leading private mortgage insurance (MI) companies, today submitted a comment letter to the Federal Housing Finance Agency (FHFA) on its Notice of Proposed Rulemaking (NPR) on “Amendments to the Enterprise Regulatory Capital Framework (ERCF) Rule – Prescribed Leverage Buffer Amount and Credit Risk Transfer.” In its letter, USMI emphasizes the importance of setting appropriate, balanced, and analytically justified requirements for the government-sponsored enterprises (Enterprises), Fannie Mae and Freddie Mac, to simultaneously ensure their financial strength and borrowers’ continued access to affordable mortgage finance credit in the conventional market.

“We appreciate the work FHFA has undertaken to date to provide for minimum capital requirements for the Enterprises, including the December 2020 final rule to establish a post-conservatorship capital framework,” said Lindsey Johnson, President of USMI. “While a robust framework is necessary to ensure the stability of the housing finance system, overly stringent requirements or ones that inaccurately reflect the risks of the assets held by the Enterprises can be disruptive. It is critical FHFA creates a capital framework that strikes an appropriate balance between maintaining borrowers’ access to affordable mortgage credit and ensuring the Enterprises and taxpayers are protected from risk.”

In its comments, USMI writes the final rule ensures the Enterprises have sufficient levels of capital to withstand a steep economic downturn but recommends the following to FHFA:

  • Adjust credit risk transfer (CRT) minimum risk weight floor to lower than 5 percent. USMI writes that any CRT floor should be designed to consider whether it will have the unintended consequences of discouraging the use of CRT or motivate CRT structures in which the Enterprises retain credit risk simply to justify the arbitrary capital floor. It urges FHFA to consider adjusting the CRT minimum risk weight floor lower than its proposed 5 percent change to a level closer to the statistically determined risk in a retained position to better align the CRT decisioning with the underlying economics and risks posed by the transaction. USMI also recommends FHFA establish and make public the model used to assess the CRT capital benefit, the statistical basis for any floor, and an analysis of the CRT capital treatment impact on the statutory goals of the Enterprises.
  • Consider alternative methods to determine the Prescribed Leverage Buffer Amount (PLBA). USMI agrees that the PLBA needs to be adjusted, and that 1.5 percent is excessive, but it recommends FHFA consider alternative methods of determining the amount of the PLBA that more closely relate to risk than the Stability Capital Buffer. USMI writes that it emphatically agrees that the PLBA should not be the usual binding constraint on the Enterprises. However, the NPR does not explain why 50 percent of the Stability Capital Buffer is the appropriate standard. The Stability Capital Buffer itself is a subjectively determined capital requirement and no rationale has been provided for why 5 basis points times market share over 5 percent is chosen, how it is related to the risk, or why the threat to the national housing finance system is not adequately dealt with through the other elements of the ERCF.
  • Reduce the single-family risk weight floor to 10 percent or less. USMI recommends the minimum 20 percent risk weight floor for single-family mortgages be reduced to 10 percent or less to more accurately account for the improvements in mortgage lending since the 2008 financial crisis, and to reflect and allow for credit enhancement, while also still requiring the Enterprises to hold an amount of capital against remote credit risk exposure more accurately. Reducing the single-family risk weight floor to 10 percent or less better achieves this outcome.
  • Make changes to the Countercyclical Adjustment. While FHFA does not discuss in the NPR, USMI does comment on the Countercyclical Adjustment impact within the 2020 ERCF final rule. Significant home price appreciation (HPA), such as what occurred over the last two years, under the Countercyclical Adjustment, will require the Enterprises to hold more capital against higher mark-to-market loan-to-value (MTMLTV) loans, likely resulting in increased pricing of these loans. Specifically, USMI urges FHFA to:
    • Reconsider and recalibrate the Countercyclical Adjustment. USMI recommends this to ensure the outcome of this adjustment meet FHFA’s policy objectives and considers real-world scenarios where there is significant home price appreciation above or below an inflation adjusted long-term trend. 
    • Report on whether significant HPA is based on market fundamentals or something else. While FHFA notes in the final rule it does not have discretion around the Countercyclical Adjustment, this should be re-evaluated. Based on market data, including FHFA’s own Housing Price Index, the agency should determine and report on why home prices are escalating. It may be appropriate for FHFA to have discretion to cap capital increases to up to 20 percent when HPA exceeds a certain threshold, rather than allowing for a 40-50 percent increase as would be applicable in today’s market with today’s market HPA. 
    • Consider recalibrating the Countercyclical Adjustment based on the reassessment. To address the significant impact that the current approach can have on the required capital, and thus the pricing of certain loans, FHFA should consider the different recommendations made in the 2020 NPR responses, including using asymmetric MTMLTV collars, and/or allowing for wider collars (perhaps 7.5 or 10 percent) during increased HPA versus when home prices are declining, or capping the capital increases to up to 20 percent when HPA exceeds a certain threshold.
    • Simplify the language and formula for the Countercyclical Adjustment. The Countercyclical Adjustment element of the ERCF is extremely complex and difficult to analyze.  It would benefit all stakeholders if FHFA took a more direct and simpler to read and analyze approach to this section.

An executive summary of USMI’s comments can be found here. USMI’s 2020 full comments can be found here and an executive summary can be found here. USMI’s comments on the FHFA’s 2018 proposed Enterprise capital framework can be found here.

###

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.

Letter: Comments to FHFA on Amendments to the Enterprise Regulatory Capital Framework Rule

In November 2021, USMI submitted a comment letter to the Federal Housing Finance Agency (FHFA) on its Notice of Proposed Rulemaking (NPR) on “Amendments to the Enterprise Regulatory Capital Framework (ERCF) Rule – Prescribed Leverage Buffer Amount and Credit Risk Transfer.” In its comments, USMI writes the final rule ensures the Enterprises have sufficient levels of capital to withstand a steep economic downturn but recommends the following to FHFA:  

  • Adjust credit risk transfer (CRT) minimum risk weight floor to lower than 5 percent. USMI writes that any CRT floor should be designed to consider whether it will have the unintended consequences of discouraging the use of CRT or motivate CRT structures in which the Enterprises retain credit risk simply to justify the arbitrary capital floor. It urges FHFA to consider adjusting the CRT minimum risk weight floor lower than its proposed 5 percent change to a level closer to the statistically determined risk in a retained position to better align the CRT decisioning with the underlying economics and risks posed by the transaction. USMI also recommends FHFA establish and make public the model used to assess the CRT capital benefit, the statistical basis for any floor, and an analysis of the CRT capital treatment impact on the statutory goals of the Enterprises.  
  • Consider alternative methods to determine the Prescribed Leverage Buffer Amount (PLBA). USMI agrees that the PLBA needs to be adjusted, and that 1.5 percent is excessive, but it recommends FHFA consider alternative methods of determining the amount of the PLBA that more closely relate to risk than the Stability Capital Buffer. USMI writes that it emphatically agrees that the PLBA should not be the usual binding constraint on the Enterprises. However, the NPR does not explain why 50 percent of the Stability Capital Buffer is the appropriate standard. The Stability Capital Buffer itself is a subjectively determined capital requirement and no rationale has been provided for why 5 basis points times market share over 5 percent is chosen, how it is related to the risk, or why the threat to the national housing finance system is not adequately dealt with through the other elements of the ERCF.  
  • Reduce the single-family risk weight floor to 10 percent or less. USMI recommends the minimum 20 percent risk weight floor for single-family mortgages be reduced to 10 percent or less to more accurately account for the improvements in mortgage lending since the 2008 financial crisis, and to reflect and allow for credit enhancement, while also still requiring the Enterprises to hold an amount of capital against remote credit risk exposure more accurately. Reducing the single-family risk weight floor to 10 percent or less better achieves this outcome.  
  • Make changes to the Countercyclical Adjustment. While FHFA does not discuss in the NPR, USMI does comment on the Countercyclical Adjustment impact within the 2020 ERCF final rule. Significant home price appreciation (HPA), such as what occurred over the last two years, under the Countercyclical Adjustment, will require the Enterprises to hold more capital against higher mark-to-market loan-to-value (MTMLTV) loans, likely resulting in increased pricing of these loans. Specifically, USMI urges FHFA to:  
    • Reconsider and recalibrate the Countercyclical Adjustment. USMI recommends this to ensure the outcome of this adjustment meet FHFA’s policy objectives and considers real-world scenarios where there is significant home price appreciation above or below an inflation adjusted long-term trend.   
    • Report on whether significant HPA is based on market fundamentals or something else. While FHFA notes in the final rule it does not have discretion around the Countercyclical Adjustment, this should be re-evaluated. Based on market data, including FHFA’s own Housing Price Index, the agency should determine and report on why home prices are escalating. It may be appropriate for FHFA to have discretion to cap capital increases to up to 20 percent when HPA exceeds a certain threshold, rather than allowing for a 40-50 percent increase as would be applicable in today’s market with today’s market HPA.  
    • Consider recalibrating the Countercyclical Adjustment based on the reassessment. To address the significant impact that the current approach can have on the required capital, and thus the pricing of certain loans, FHFA should consider the different recommendations made in the 2020 NPR responses, including using asymmetric MTMLTV collars, and/or allowing for wider collars (perhaps 7.5 or 10 percent) during increased HPA versus when home prices are declining, or capping the capital increases to up to 20 percent when HPA exceeds a certain threshold. 
    • Simplify the language and formula for the Countercyclical Adjustment. The Countercyclical Adjustment element of the ERCF is extremely complex and difficult to analyze.  It would benefit all stakeholders if FHFA took a more direct and simpler to read and analyze approach to this section. 

###

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. 

Statement: FHA’s 2021 Annual Financial Report to Congress

WASHINGTONLindsey Johnson, President of the U.S. Mortgage Insurers (USMI), released the following statement on the Federal Housing Administration’s (FHA) release of its Fiscal Year 2021 Annual Report to Congress on the Financial Status of the Mutual Mortgage Insurance Fund [hud.gov] (MMIF). This year’s report shows that the MMIF’s combined capital ratio stands at 8.03 percent, up from 6.10 percent for Fiscal Year 2020, an increase of 1.93 percent. The single-family forward mortgage portfolio capital ratio stood at 7.99 percent and the reverse mortgage program stood at 6.08 percent:

“We applaud the FHA’s continued efforts and commitment to sustain the fiscal health of the MMIF. The FHA is a vital part of the housing finance system and a critical resource for borrowers who may not have access to homeownership through the conventional market. We appreciate the FHA’s continued focus on assisting borrowers who were impacted by the COVID-19 pandemic. While the seriously delinquent rate remains high at 8.81 percent, it continues to improve from a high of 11.9 percent in November 2020. The mortgage market welcomes this improvement and USMI encourages the FHA to remain focused on assisting these borrowers. USMI urges the FHA to maintain its current disciplined approach to policies and pricing to ensure that the long-term financial health of the MMIF best serves future homebuyers and is prepared for an increase in potential foreclosures as the COVID-19 forbearance period ends.

“USMI and our member companies look forward to continuing to work with the FHA, the Administration, and Congress to promote a coordinated and consistent housing market to meet the needs of low-down payment borrowers while protecting taxpayers.”

###

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.