Message from the Chairman: Private Mortgage Insurance – Serving the U.S. Housing Finance System for Over 65 Years
By Adolfo Marzol, Chairman of USMI
For just over a month now I have had the privilege to serve again as Chairman of USMI. I was proud to have played a role in founding this organization and watching its development over nearly a decade. Coming into this role after several years of public service at the Federal Housing Finance Agency (FHFA) and the Department of Housing and Urban Development (HUD) gives me some added perspective about the current state of the U.S. housing finance system and the challenges it faces.
The private mortgage insurance (MI) industry remains rightfully focused on promoting affordable and sustainable homeownership opportunities, especially for minorities and traditionally underserved communities. This includes playing an important role in addressing the racial homeownership gap and collaborating with FHFA, Fannie Mae and Freddie Mac – the government-sponsored enterprises (GSEs) – to implement their Equitable Housing Finance Plans. At the same time, after witnessing numerous cycles over the last 40 years in housing finance, 2022 is clearly a year of shifting economic winds for the housing market and overall U.S. economy. Our actions to reach more borrowers and close the racial homeownership gap must remain mindful of the broader environment, because real success means borrowers and their families staying in their homes.
As the U.S. housing market experiences record high home price appreciation (HPA), largely driven by severely limited affordable housing supply, homebuyers – especially first-time, low- to moderate-income (LMI), and minority borrowers – face significant challenges in securing a home. This reality leaves many potential homeowners locked out of the market. In light of a red-hot housing market and rising mortgage interest rates, it is critical that affordable, sustainable low down payment mortgages remain available to meet borrowers’ needs.
Private MI enhances the ability of first-time, minority, and LMI homebuyers to purchase homes in an affordable and sustainable way. It enables them to achieve housing stability and build generational wealth by allowing them to purchase a home sooner with less than a 20% down payment – a goal that progressively moves further out of reach due to rising mortgage rates, inflation, and record-high house prices. In fact, USMI’s recent “MI in Your State” report revealed that saving for a 20% down payment could take potential homebuyers 14 years — significantly longer than buying with 5% down and a conventional mortgage backed by private MI.
The report also found that in its 65-year history, private MI has enabled more than 37 million people to access affordable and sustainable low down payment mortgages. In the last year alone, private MI helped nearly 2 million homeowners purchase or refinance a mortgage. Nearly 60% of purchase loans with private MI were to first-time buyers, accounting for nearly 900,000 new homeowners, and more than 40% of borrowers with private MI had annual incomes below $75,000, with an average loan amount of $310,000.
Private MI is a proven part of the affordable housing solution, representing a small cost that allows homebuyers with smaller down payments to access the dream of homeownership. A working paper from Fannie Mae revealed what drives homebuying costs, highlighting that the largest contributors are consistently ongoing non-mortgage costs, which collectively are about half of total costs over the homeownership period. The paper notes “[t]he fees charged to cover borrower credit risk that are part of the cost of the mortgage, GSE g-fees (roughly four percent) and PMI [private MI] (roughly one to three percent) are a relatively small part of the cost of homeownership.” Moreover, while other housing and mortgage costs have increased in recent years, the average pricing of private MI has decreased by more than 30% over the past four years. Meanwhile, the GSEs’ pricing has remained steady, with g-fees averaging 53-56 basis points (bps) for 2017-2020.
One potential barrier to homeownership that has been noted by some is high closing costs. It is important to note that borrower-paid private MI , the predominant form of MI used in today’s market, requires just a small monthly payment. There is no material upfront cost to borrowers. The facts are clear: private MI facilitates the ability of borrowers to get into a home affordably, with much less cash needed at the closing table than putting 20% down.
Moreover, for over six decades, private MI has served as the first layer of protection for the GSEs and American taxpayers against undue credit risk in the conventional mortgage market. Private MI attaches to a loan the day it is originated, which means that even before the lender might sell the mortgage into the GSE-backed secondary market, it is protected by private capital and therefore does not directly expose the government. Hence, when it comes to insuring low down payment mortgages, MI serves as a “second pair of eyes” on that risk during the underwriting process to ensure borrowers are placed into sustainable homeownership and simultaneously serves as an additional layer of protection in the mortgage finance system.
In 2021, the industry supported nearly $585 billion in mortgage originations, and insured $1.4 trillion of mortgages, including $1.2 trillion of mortgages backed by the GSEs. The industry collectively holds approximately 170% of required capital levels set by the GSEs. Private MI has also proven to be a reliable method for shielding the GSEs from losses, having paid nearly $60 billion in claims since the 2008 financial crisis. This underscores the industry’s important role in the housing finance system, which accounts for 65 years of experience in underwriting and actively managing mortgage credit risk through all market cycles. Further, private MI is the only form of credit enhancement and credit risk transfer (CRT) mechanism that has never left the market and has been there to constantly support homebuyers, lenders, and the GSEs.
The GSEs’ recently released Equitable Housing Finance Plans outline proposals to provide affordable housing solutions and increase minority homeownership, most notably through the expanded use of special purposes credit programs (SPCPs). We welcome FHFA’s emphasis on transparency announced as part of its “pilot transparency framework,” and we encourage FHFA to finalize the “New Products and Activities” rulemaking to ensure fully robust transparency, vetting, and oversight of pilots and other new activities at the GSEs. A transparent and objective approval process is paramount to ensure that new pilots and programs truly serve borrowers, facilitate broad buy-in and feedback from market participants, and do not increase risk in the housing market.
As policymakers and industry work to address longstanding inequities in the mortgage markets, it is critical that consistent transparency be hard-wired into the housing finance system. Collaboration between regulatory agencies, the GSEs, market participants, and consumer advocates is important to monitor origination trends, analyze the credit box and mortgage market, and develop strategies and products to expand access to affordable and sustainable homeownership.