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Seth: We are here today to talk about the private mortgage insurance industry and how it served borrowers and taxpayers throughout 2022 during a rapidly evolving economic environment and housing market. To help explain how the industry performed and to walk us through the latest data, USMI Chairman Adolfo Marzol is with us. Adolfo is an experienced financial and risk management leader with substantial expertise in issues related to housing finance, holding senior roles at the Department of Housing and Urban Development, the Federal Housing Finance Agency, Fannie Mae and Essent. Thanks for being here, Adolfo.
Adolfo: Thanks, Seth. I’m delighted to be here.
Seth: I want to start by talking about 2022. While potential buyers continue to face economic challenges with high home prices, rising interest rates and constrained inventory, the private MI industry has continued to facilitate affordable and sustainable access to homeownership throughout. Can you help us peel back the industry’s numbers and share your thoughts on 2022 specifically for first-time and low down payment borrowers?
Adolfo: Absolutely. While Americans continue to face economic challenges, in 2022 the housing market pivoted away from the refinance activity driven by low interest rates and really saw a return to more historically normal volumes and a much more purchase-oriented market. In 2022, private mortgage insurers helped over 1 million families purchase or refinance a home, and the industry supported nearly $402 billion in mortgage originations, and about 97% of that volume was to purchase a home. The private MI market continues to be driven by more and more first-time homebuyers coming into the market. Of all the loans purchased using private MI in 2022, 62% supported first-time buyers. Now, these borrowers they’re creditworthy and they have the income to afford the mortgage payments, but they struggle to put 20% down on their first house. Private MI is a great fit for them. Private MI enables borrowers to gain access to the housing market more quickly by allowing down payments as little as 3%, but the typical down payment ranges from 5 to 10%. In 2022, the private MI market also served a large number of low- to moderate-income borrowers. Nearly 35% of borrowers with private MI had annual incomes below $75,000. The private MI industry serves and supports both low down payment and low- to moderate-income borrowers in the housing market while protecting lenders and taxpayers against potential defaults.
Seth: Wow. That is quite an impact. So, we know that private mortgage insurance facilitates low down payment home financing in the conventional market because private mortgage insurers are in the trenches every single day working with lender partners to serve borrowers. Can you elaborate on the importance of low down payment lending?
Adolfo: Seth, low down payment mortgages are critical to enable first-time, low- to moderate-income and minority homebuyers to achieve the dream of homeownership. For many borrowers, the need to accumulate a large amount of cash for a down payment, usually 20% of the property’s value, is the biggest hurdle in the homebuying process. Eighty percent of first-time homebuyers utilizing financing do so with low down payment mortgages. And conventional mortgages with private MI have been the number one way in recent years for these borrowers to become homeowners. Between rising rents, student loan payments, and high home prices, it could take a family on average over 30 years to save for a 20% down payment. There are many creditworthy borrowers who don’t have that large of a down payment, but they deserve to have options to enable them to get into homes and enjoy the benefits of homeownership. With MI, it’s important that these families have access to mortgages with 3, 5 or 10% down payments so they can purchase homes sooner and begin to build the stability and long-term wealth that comes with successful homeownership.
Seth: Adolfo, there’s been a fair amount of stress in the banking sector reported recently, and the Federal Reserve and other regulators have had to take some pretty extraordinary actions to stabilize the banking system. Has the private MI industry needed any special support from regulators during this time period?
Adolfo: Not at all. The MI industry has continued to be a source of financial strength in the markets, providing uninterrupted access to mortgage credit without any special interventions or actions during the sudden heightened stress we’ve been witnessing in other sectors of financial services. The same was true during the extraordinary financial stress that hit during the onset of COVID. MI remained available and affordable at all times. Now, the reason for this stark difference is that the MI business model is very different than banks. Mortgage insurers don’t rely on uninsured deposits for funding, which we have seen can be quickly withdrawn by nervous depositors and result in a catastrophic run on the bank. Bank runs can be unpredictable and even financially sound banks can fail when depositors lose confidence and pull their funds en masse. In contrast, MI companies are not relying on deposits or other sources of short-term funding instead holding their regulatory capital in large portfolios of safe and liquid assets, such as U.S. Treasury bonds and notes, sufficient to pay future MI claims as they arise over time. The MI model is built to promote stability and safety and soundness through the economic cycle while providing access to affordable mortgage financing for low down payment borrowers.
Seth: Adolfo, thanks for that information and for speaking to the critical role that private MI plays in helping millions of people access affordable mortgage credit. I’d like to discuss what the industry has done to help ensure it’s well capitalized. Can you speak to how the private mortgage insurance industry has evolved since the 2008 financial crisis to help more borrowers and serve as a source of strength in the housing finance system?
Adolfo: Seth, the private MI industry has evolved dramatically in the last 15 years and it’s better positioned today than ever to support home-ready families and provide private capital solutions that insulate lenders, the government-sponsored enterprises, and ultimately taxpayers from risk in the event of an economic downturn. A key element of the industry’s success and its ability to scale up for record volume during the pandemic is the industry’s transformation since the 2008 financial crisis into sophisticated managers of mortgage credit risk. Since 2008, the private MI industry transformed its business model through enhanced capital, risk and operational standards in order to be more resilient and withstand severe economic stress. The terms of private MI coverage, the regulatory framework governing the industry, its asset requirements and capital position, and its underwriting standards have all fundamentally changed and the performance of the private MI industry through the pandemic underscores its strength to the housing finance system.
The private MI industry was there providing uninterrupted support to lenders and borrowers at a time when it was needed most. At the end of 2022, the private mortgage insurance industry insured more than $1.5 trillion of mortgages, including more than $1.3 trillion of mortgages backed by the mortgage giants, Fannie Mae and Freddie Mac often referred to as the GSEs. More than 5.7 million active loans had private mortgage insurance coverage. The private MI industry is safe and sound in part because it meets strict operational and capital requirements known as the Private Mortgage Insurer Eligibility Requirements, which were developed and are periodically updated by the GSEs and their regulator, the Federal Housing Finance Agency. At the end of 2022, the private MI industry held nearly $11 billion of eligible assets in excess of the PMIERs requirements, which represented a 172% sufficiency ratio. What does that mean? It means that private mortgage insurers hold on average 72% more assets than their required regulatory threshold.
Also, private MI companies now utilize more granular and dynamic pricing models that allow them to better tailor solutions to the risk profile of an individual borrower or loan. They’ve aligned their recission relief principles with the GSE representations and warranties framework to provide increased certainty of coverage, and they have updated policy terms to maximize clarity around coverage and servicing. Overall, the MI industry’s core mission is to help families gain access to affordable mortgage credit and succeed as sustainable homeowners. All of the changes since 2008 have positioned the MI industry to meet the rising demand for homeownership while serving as a source of strength and support in the housing finance system.
Seth: Adolfo, one of the recent successes of the 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 private mortgage insurers, programmatic use of credit risk transfer transactions and the value they bring to the industry?
Adolfo: Of course. As part of the industry’s evolution that I mentioned previously, today’s private MI industry uses a buy, manage and distribute model when it comes to risk. In doing so, we leverage programmatic reinsurance, and that’s both through traditional reinsurance and capital markets-based reinsurance. These tools serve to absorb risk and loss in stress scenarios. In doing so, they enhance the industry’s counterparty strength. They bolster and diversify our capital profile beyond entity-based equity capital, and it allows private mortgage insurers to write more business and support more borrowers with greater efficiency. Every dollar of risk transfer opens up additional mortgage volume that MI can use to support new borrowers. From 2015 through 2022, the private MI industry issued 51 insurance linked notes through the capital markets, transferring more than $20.8 billion of risk exposure on nearly 2.2 trillion of notional mortgages and completed 42 quota share and excess of loss reinsurance transactions ceding $47 billion of additional risk to the traditional reinsurance markets. In total, that’s nearly $68 billion of risk transferred since 2015, providing substantial additional capital that the private MI industry deployed to support new borrowers. These transactions have proven to be a durable and cost-effective source of support for the private MI industry and the ability to use MI-linked note transactions to access reinsurance through the capital markets has been invaluable, increasing the capacity of our industry to serve borrowers in need of low down payment financing.
Seth: Speaking of MI-linked notes, I want to touch on a proposed rulemaking by the Securities and Exchange Commission that may unintentionally impact the private mortgage insurance industry’s ability to procure reinsurance through the capital markets. Could you explain what the SEC is proposing and what regulators should do to avoid impacting the private MI industry’s ability to serve consumers and taxpayers?
Adolfo: Seth, it’s a complicated rule, but I’m going to do my best. The SEC has re-proposed a rule that’s intended to prevent the sale of asset-backed securities, usually referred to as ABS, which are tainted by material conflicts of interest. The intent of the rule is to prevent securitization participants from betting against the interest of investors in those ABS transactions. As currently written, however, the proposal is very broad and we think unintentionally may adversely impact MI-linked note transactions that we’ve used to procure reinsurance through the capital markets since 2015. Remember, every dollar of risk transfer through private MIs credit risk programs opens up another dollar of mortgage volume that the MI industry can use to support new borrowers, so the ability to continue to source reinsurance from the capital markets is very important. As a result, all six U.S. private mortgage insurers as well as other housing policy stakeholders have filed comments urging the SEC to clarify the rule so that the capital markets reinsurance transactions of private MI companies are not impaired inadvertently.
Seth: Thanks for explaining a very complicated issue. It’s also 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 and demand in the market. What are your expectations for the housing market and in particular the low down payment market in 2023?
Adolfo: Well, there are cross-cutting currents in this market. The job market remains healthy, household incomes are strong, and we continue to see the demand for housing is high. On the other hand, elevated interest rates, a shortage of affordable housing supply and the direction of home prices are important factors that will continue to be dominant themes for the balance of this year. In this environment, access to affordable mortgage financing through the low down payment solutions offered by the private MI industry take on added importance, especially for first-time homebuyers.
Seth: Thank you, Adolfo. 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 credit risk. What solutions would you bring forward to policy makers as they think about these issues of access, affordability, and sustainability?
Adolfo: First off, the MI sector understands how crucial it is to participate in policy discussions that define and shape the mortgage industry and to ensure we are adequately serving the needs of first-time and low- to moderate-income borrowers. 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 in a manner that appropriately guards against systemic risk is critically important. 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, we place private capital in front of the GSEs and taxpayers to absorb risk and loss in a downturn. The private MI industry is keen to work collaboratively with policymakers, regulators, the GSEs, market participants and consumer advocates. Given the vital 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.
Seth: There’s a longstanding debate about the appropriate balance between the government and taxpayer-backed Federal Housing Administration and utilizing private mortgage insurance. In one, the government backs nearly 100% of the risk, and in the other our industry and private capital stands in the first-loss position. How should policymakers think about these two markets and the important role they each play?
Adolfo: Conventional loans with MI and mortgages insured by the FHA are the two primary methods for American families to attain homeownership with down payments of less than 20%. Policymakers really need to consider that both private MI and FHA have a critical place in a well-functioning housing finance system. Each has a role to play and it’s in the interest of borrowers and taxpayers for there to be coordinated federal housing policy to ensure that the FHA and the conventional markets complement one another rather than compete against each other. It’s important to remember that through private MI private capital stands ready to absorb credit loss from low down payment loans rather than the taxpayers who back FHA. Plus, for many borrowers conventional execution with private MI is much more attractive than an FHA loan. The conventional market, including the private mortgage insurance industry, is backed by private capital and is well-positioned to play a larger role in facilitating access to mortgage credit.
Seth: Adolfo, I have one more question for you. Considering your extensive experience in housing finance in both public and private sector roles, what is your message to Washington policymakers about how the private MI industry can better serve first-time and low- to moderate-income borrowers?
Adolfo: Seth, responsibly expanding access to homeownership and all the benefits it provides for first-time and low- to moderate-income borrowers is critically important. The private MI industry is well-positioned to help the broader policy initiative of creating greater equity in housing. Higher home prices and interest rates have made it ever more important to find affordable and sustainable solutions for first-time and low- to moderate-income borrowers. One avenue that we think is very important is for policymakers and housing market participants to work together to dispel the very persistent myth that homebuyers need a 20% or more upfront down payment to qualify for financing. They don’t, and we need to continue to get that message out. Low down payment mortgages play a critical role in allowing low-to moderate-income, minority and first-time buyers to buy a home sooner to begin to build stronger families, community ties, and create the long-term wealth and financial stability that homeownership can bring.
Seth: Adolfo, thanks for your leadership within the industry and here within USMI. We greatly appreciate your thoughts and your time today.
Adolfo: Thanks so much, Seth. A pleasure to be with you.