Blog: Interview with National MI President and CEO Adam Pollitzer on MI-CRT
Since 2015, the private mortgage insurance (MI) industry has used MI Credit Risk Transfer (MI-CRT) to reduce volatility in the business and bring more sources of private capital to the housing finance market. MI-CRT has significantly reduced the industry’s exposure to mortgage credit “tail risk.” This, combined with enhanced Private Mortgage Insurer Eligibility Requirements (PMIERs), has transformed the MI industry from a cyclical business to a more stable, long-term manager of mortgage credit risk. It also brings tremendous value to other institutions where private MI assumes the first loss—while also facilitating access to affordable mortgage finance credit for millions of people who do not have significant down payments.
From 2021 through 2021, private mortgage insurers have collectively transferred over $55 billion in risk on nearly $2.8 trillion of insurance-in-force (IIF) through both reinsurance transactions and insurance-linked notes (ILNs). USMI President Lindsey Johnson sat down with National MI President and CEO Adam Pollitzer to discuss the latest on MI-CRT. Watch the full interview below and read our press release.
Full transcript of the interview follows.
Lindsey: We are here today to talk about the use of credit risk transfer, or CRT, with the private mortgage insurance industry. And to help us explain the value of MI-CRT and walk us through the latest data, Adam Pollitzer, President and CEO of National MI, is with us. Adam has extensive experience in the mortgage insurance and the mortgage banking industries. As President and CEO of National MI, Adam is responsible for the company’s day-to-day management, the financial performance and long-term growth strategy. Adam, thanks for being here.
Adam: Well, thank you, Lindsey. I’m delighted to be here.
Lindsey: So, I want to start by talking about 2021, and then we’ll pivot to what’s ahead. While there’s certainly been some economic challenges this past year with skyrocketing home prices and record low supply of housing inventory, the real estate market has remained strong and MI volume was high in 2021. Can you help us peel back some of the numbers and just share your thoughts on 2021 in the market, and specifically for low down payment borrowers?
Adam: Well, certainly. As you note, there are a number of cross currents that have impacted the macro environment and housing market of late. But in 2021, total first lien mortgage originations reached a record $4.8 trillion–up 17% compared to 2020 origination volume. House prices continue to increase nationwide at an accelerated pace during the year, driven by a persistent supply-demand imbalance. Demographic drivers, record low interest rates through much of 2021, and the experience of the pandemic itself, which fueled a practical and emotional pull towards homeownership, all contributed to record housing demand, while supply was severely constrained with housing inventory levels running at roughly two months for the duration of the year. Single-family residential house prices increased by 17.5%, and the median existing home sale price rose to $375,000—up 15% year-on-year. It was a dynamic, fast developing market and the private mortgage insurance industry had a central role in helping low down payment borrowers navigate through challenges and gain access to housing. Private MI coverage provides borrowers with the assistance they need to access mortgage credit and in doing so, our industry helps open the door to affordable and sustainable home ownership in communities across the country. In 2021, there was greater need for private MI support than ever before, and private MI providers insured nearly $585 billion in mortgage loan originations. In the process, our industry helped nearly 2 million families either purchase a home or refinance an existing mortgage to take advantage of record low interest rates and realize monthly payment savings.
Lindsey: Adam, thanks for that detailed information, and for speaking to the critical role that the private MI industry plays in helping millions of people access affordable mortgage credit. I’d like to turn to discussing what the industry’s done to help ensure it’s well capitalized, and in a position of strength during these past two challenging years. Can you speak to how the private MI industry has evolved over the past several years to help borrowers and also to serve as that source of strength in the housing finance system?
Adam: The private MI industry has evolved dramatically over the last decade and is better positioned today than ever before, to support borrowers in need and provide private capital solutions that insulate lenders, the GSEs, and ultimately taxpayers from risk and loss in the event of an economic downturn. Over the last 10 years, the terms of our coverage, the regulatory framework governing our actions, our funding requirements and capital position, our underwriting standards, and the way we approach evaluating risk, pricing policies and managing our tail exposure have all fundamentally changed. And the performance of the private MI industry through the arc of the pandemic serves as a highlight. Homeownership is essential and the onset of the pandemic, introduction of early shelter in place directives, and the subsequent and extended period of remote engagement for work, school and otherwise reinforced this. Through it all, the private MI industry was there providing uninterrupted support to lenders and borrowers at a time when they needed us most. At year-end 2021, the private mortgage insurance industry ensured $1.4 trillion of mortgages, including $1.2 trillion of mortgages backed by the GSEs. The private MI industry is the largest counterparty to each of Fannie Mae and Freddie Mac. And as such, we’re required to comply with a set of operational and capital standards known as the Private Mortgage Insurance Eligibility Requirements, which were developed and are periodically updated by the GSEs and FHFA. At year-end 2021, the private MI industry held a collective $25.3 billion qualifying PMIERs funding, which represented a 170% sufficiency ratio–meaning we held 70% more capital than the required regulatory threshold. Private MI companies now utilize more granular dynamic pricing models that allow us to better tailor solutions to the risk profile of an individual borrower or loan. We’ve aligned our rescission relief principles with the GSE rep and warrant framework to provide increased certainty of coverage, and we’ve updated our policy terms with the introduction of a new master policy in March 2020 to maximize clarity around coverage and servicing. Overall, we’re guided by our desire to help borrowers gain access to housing and succeed as sustainable homeowners, and we’re well positioned to continue as a source of strength and support in the housing finance system.
Lindsey: So, Adam, one of the recent successes of private MI industry has been the expansion of risk management strategies to better price, monitor and distribute mortgage credit risk. Can you specifically speak to the value of MI’s programmatic use of credit risk transfer transactions and the value that they bring to the industry?
Adam: This is an exciting one. CRT, in both capital markets and traditional reinsurance format, is central to how the private MI industry manages the buildup of credit risk on our balance sheets. The tools we use—insurance-linked notes offerings, excess of loss reinsurance treaties, and quota share reinsurance agreements—each serve to absorb risk and loss in stress scenarios. And in doing so, they enhance our counterparty strength, bolster and diversify our funding profile beyond entity-based equity capital, and allow us to write more business and support more borrowers with greater efficiency. Every dollar of risk transfer through CRT opens up another dollar of mortgage volume that we can support for new borrowers. Since 2015, the private MI industry has issued 49 ILNs, transferring $20 billion of risk exposure on more than $2 trillion of notional mortgages to capital market investors and completed 25 quota share and excess of loss reinsurance transactions, ceding $35 billion of additional risk to the traditional reinsurance market. In total, that’s $55 billion of risk transferred off of private MI balance sheets since 2015 and $55 billion of additional capacity that the private MI industry has been able to deploy in support of new borrowers. CRT has proven to be a durable cost-efficient source of support for the private MI industry. And I expect that private MIs will continue to pursue deals and syndicate their credit risk on a programmatic basis going forward.
Lindsey: We spoke to some of those challenges in 2021. And while some housing market participants either paused or they reduced their CRT activities, the private MI industry continued to execute insurance-linked notes or ILN transactions, as you mentioned, and also enter into reinsurance agreements. Can you speak to how and why the industry was able to maintain robust CRT programs in 2021, including the fact that ILN volume was nearly 40% higher than pre-pandemic levels?
Adam: Absolutely. The private MI industry’s ability to consistently and successfully execute ILN, quota share, and excess of loss transactions through the course of the pandemic broadly demonstrates the durability of these markets as a source of support for private mortgage insurance risk. It also underscores the confidence that investors and reinsures have in our industry in terms of the role we play in the housing finance system and the disciplined approach we take in writing new business. As for private MI issuance activity in 2021, our CRT goals are driven by our new business production—2021 was a record origination year and a record year for MI industry volume. Writing more business during the year, provided us with an opportunity and a need to issue larger deals and with greater frequency than before.
Lindsey: It’s great to hear about the strength of the industry and how it’s innovated to really enable access to mortgage credit for millions of borrowers and to support that volume. What are your expectations for the housing market and, in particular, the low down payment market for 2022?
Adam: Well, I wish I had a crystal ball. It would certainly make managing our business much easier. The broader macro environment is dynamic highlighted by persistent inflation, anticipated Fed action and quantitative tightening, lingering risk from the pandemic, and geopolitical instability with the war in Ukraine. Despite these headwinds though, the job market remains healthy, household incomes are growing rapidly, consumer sheets are strong, and demand for housing is high. On balance, we expect purchase demand and purchase origination volume will remain strong while we expect refinancing activity will slow considerably in 2022 from the record levels we saw in 2020 and 2021 given the sharp increase in interest rates since the beginning of the year. Rising rates and the continued pace of house price appreciation are likely to be dominant themes through the year. And while rising prices are a real positive for existing homeowners who can tap their equity to fund home improvement projects and other goals, it’s making things increasingly difficult for new buyers to find homes that work in their price range. In this environment, the low down payment solutions offered by the private MI industry take on added importance, and we expect a growing percentage of borrowers will turn to our industry for support through the year.
Lindsey: Thanks Adam. In Washington, the conversation around housing policy often includes sustainable access to mortgage finance credit and making sure that taxpayers are not exposed to undue mortgage credit risk. What solutions would you bring forward to policymakers as they think about access, affordability, and sustainability?
Adam: We firmly believe that providing all borrowers with an equitable opportunity to access the housing market, establish a community identity, and build long-term wealth through homeownership in a manner that appropriately guards against systemic risk is critically important. And at its core, this is the role of the private mortgage insurance industry, providing borrowers with down payment support and equal access to mortgage credit. While at the same time, placing private capital in front of the GSEs and taxpayers to absorb risk and loss in a downturn. USMI recently published its 2022 Policy Priorities for Access, Affordability, and Sustainability in the U.S. Housing Finance System and it’s worth reading. These are challenging issues that can’t be solved alone, and the private MI industry is keen to work collaboratively with policymakers, regulators, the GSEs, market participants, and consumer advocates to address them. Given the central role we play in the housing finance system, we’re well positioned to both lead with innovation and support broader initiatives to increase borrower access to affordable and sustainable mortgage credit.
Lindsey: Adam, I have one more question for you and that’s really what would be your message to Washington lawmakers and regulators about how the private mortgage insurance industry can better serve low- to moderate-income borrowers?
Adam: Lindsey, expanding access to homeownership and all the benefits it provides for low- to moderate-income borrowers is critically important, and the private MI industry is well positioned to help the broader policy initiative that’s being brought to bear. As house prices and interest rates increase, it’s becoming ever more important to find affordable sustainable solutions for LMI borrowers. One avenue that we think is important is for policymakers and housing market participants to work together to dispel the persistent down payment myth that homebuyers need a 20% or more upfront down payment to qualify for financing. Low down payment mortgages play a critical role in allowing LMI, minority, and first-time buyers to buy a home sooner and begin to build the long-term wealth and financial stability that homeownership brings.
Lindsey: Adam, thank you for your leadership within the industry and here within USMI. We appreciate your thoughts and your time today.
Adam: Thanks so much Lindsey.
Adam Pollitzer’s Biography
Mr. Pollitzer is the President and Chief Executive Officer of National MI. He joined the Company in 2017. Prior to his appointment as President and CEO, he served as the company’s Executive Vice President and Chief Financial Officer from 2017 to 2021. Before joining National MI, Mr. Pollitzer was a Managing Director in the corporate and investment banking division of J.P. Morgan Securities, LLC, where he led advisory and capital raising efforts on behalf of North American insurance companies. Mr. Pollitzer holds a bachelor’s degree in business administration from the Stephen M. Ross School of Business at the University of Michigan.