Category: Articles & Op-eds

Article: Private Mortgage Insurers Make Their Mark on the Industry

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Private mortgage insurance companies, although few in number, play an important role in the housing finance system by creating sustainable homeownership for borrowers and taking on GSE credit risk.

Lindsey Johnson, President and Executive Director of U.S. Mortgage Insurers (USMI) offered MReport an inside view into the world of private mortgage insurers and how they are completely changing the mortgage game.

MReport: How has the private mortgage insurance (PMI) industry changed and evolved within the housing space?

Johnson: When I think about how our industry is evolving, two key words that come to mind are: reliability and relevance. As with every other financial services industry player, private mortgage insurance has increased capital levels, enhanced counterparty standards, and changed our master policy agreements to give better clarity and certainty of coverage when our claims are paid. Wehave also had new entrants into the system. During the crisis, we had three new mortgage insurers enter into the market and are competitive players along with the three members who were formerly in the industry. We also continue to operate in the affordability space by allowing borrowers who otherwise might not be able to attain the home they want because they are unable to meet the down payment requirements. We continue to increase our reliability because we have enhanced our capital, enhanced the master policy agreement, and we are positioned to provide greater risk protection to the GSEs and lenders in the future.

As the marketplace continues to evolve, there seems to be broad consensus that the GSEs need to maintain and grow their credit risk transfer programs. They continue to explore ways that they are going to shed risk. Mortgage insurers are  adapting to be well-positioned to take  additional credit risk away from the GSEs. Mortgage insurers continue to be one of the few sources out there that the GSEs can shift risk to today and are also one of the few counterparties with staying power. We are going to be there to take credit risk away from the GSEs in the good and bad economic times. In that sense, mortgage insurers continue to prove that we are as relevant today as ever.

MReport: What are some the biggest issues that PMIs face in the mortgage industry today?

Johnson: Today, some of our greatest challenges as mortgage insurers stem from the effect of government programs, including FHA and even the GSEs, where certain policies responding to the crisis, such as FHA’s expansion into the conventional market and the GSEs addition of LLPAs, have not been retracted even after eight years post-crisis. Mortgage insurers continue to be the most competitive option in many circumstances in the conventional market. We are competing with government, oftentimes when our regulatory requirements and standards were increased almost uniformly across the board, while many government programs have not had those standards enhanced or even updated. That creates challenges for all private market players.

MReport: What are some of the largest successes private mortgage insurers are experiencing?

Johnson: We continue to do our primary business very well. In the past year, mortgage insurers expanded consumer access to mortgage finance credit to more than 725,000 new homeowners. Half of those that were served by mortgage insurers were first-time homebuyers and nearly 40 percent of those were borrowers with incomes below $75,000. That is significant and something that mortgage insurers are very proud of. These are borrowers that would most likely not be able to make a typical, substantial down payment of 20 percent that is required. They are appraised by lenders as having that higher credit risk without a down payment and we know that typically borrowers are far less likely to default on their mortgage when there is a down payment. Coming up with that down payment can be a huge hurdle for homeownership. We did the calculation  to determine that if mortgage insurance wasn’t an option, how long would it take for borrowers to save for that 20 percent down payment, and we found that it could take about 20 years for the average firefighter or school teacher to save for a down payment.

MReport: How can PMIs attract borrowers that cannot afford a down payment and get them into homes? What benefit do PMIs offer?

Johnson: It begins with education. A point that often gets missed is that unlike FHA or other options that require a higher interest rate or more fees for the entire life of the loan, private mortgage insurance is paid by the borrower and is cancelable once there is a certain amount of equity built up in the home. It’s also important to understand that we continue to be in the marketplace, we continue to be very competitive with the other options out there, and we continue to be one of the safest options for individuals to get into homes where we create sustainability in the marketplace. For the GSEs, we continue to be one of the most reliable counterparties.

MReport: What piece of advice can you offer other PMIs in the industry?

Johnson: This industry has a great story to tell. It’s one of making homeownership possible for many people that would otherwise be unable to obtain the home they want. We continue to be extremely relevant in today’s housing finance system. So many of the issues that we face today we have faced in the past, and mortgage insurers have been a tested means  to serve as a credit enhancement for borrowers to get into these homes. The housing finance system will continue to evolve, and mortgage insurance is going to be a key component and a very important credit enhancement option. Mortgage insurers are dedicated to the housing finance system and are there in both good and bad economic times. As an industry, we have to continue to tell that story.

To read the entire MReport, click here.

Statement: Polling Finds Majority Supports Using Private Capital to Reliably Reduce GSE Taxpayer Risks

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(February 16, 2016) Last week saw more activity demonstrating the value of private Mortgage Insurance as a reliable way to enhance access to mortgage credit for consumers and protect taxpayers against housing losses, particularly through greater front end risk sharing by the GSEs:

  • USMI released a new fact sheet showing how MIs are strong counterparties that reliably transfer mortgage credit risk
  • DS News reported on new polling from USMI showing strong national support for reducing GSE and taxpayer risk through increased reliance on private capital
  • USMI Chairman and Genworth MI CEO Rohit Gupta appeared at the Urban Institute /Core Logic Forum on risk sharing, “Credit Risk Transfer: Making a Successful Program Even Better.”
    • Gupta talked about the enhanced reliability and higher capital standards for MI, and how deeper MI coverage on GSE loans would almost double the amount of loss protection for the GSEs and taxpayers
    • Urban’s Laurie Goodman talked about an advantage of front end risk sharing with MI to pass savings through to consumers

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.

Newsletter: December 2015

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Recap: Making Housing Finance System More Sustainable and Reducing Taxpayer Exposure Through Increased Front End Risk Sharing

Last week, we saw several indications that momentum is growing to make the housing finance system more sustainable and reduce taxpayer exposure by further de-risking the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac with increased front end risk sharing, in particular, by expanding private Mortgage Insurance (MI) coverage.

  • Bipartisan members of Congress are urging FHFA to take additional steps to expand front end risk sharing. Representatives Stivers (R-OH) and Moore (D-WI) expressed concern over the “lack of balance between ‘front-end’ and ‘back-end’ risk sharing.”  And Representatives Luetkemeyer (R-MO) and McHenry (R-NC) sent a letter to FHFA urging them to “require the Enterprises to also explore and engage in diverse forms of front-end credit risk sharing.”  The House letters join a bipartisan Senate letter signed by Mark Warner (D-VA), Bob Corker (R-TN), Heidi Heitkamp (D-ND), Mike Crapo (R-ID), Jon Tester (D-MT), and Dean Heller (R-NV) which also encourages FHFA to expand and better define the development of credit risk transfer programs.
  • The Mortgage Bankers Association sent a letter to FHFA Director Mel Watt urging FHFA to require greater use of up-front risk sharing by the GSEs, particularly with deeper private mortgage insurance (MI) coverage, to de-risk loans before they are acquired by the GSEs.
  • Doug Holtz-Eakin of American Action Forum stated that de-risking the GSEs through greater use of private mortgage insurance (PMI) “represents a step toward finally resolving the structural flaws that contributed to the [financial] crisis.”
  • Respected analysts Laurie Goodman, James Parrott and Mark Zandi issued a joint paper – Delivering on the Promise of Risk Sharing – which provides a very thorough analysis of all the options, including up front risk sharing with MI.
  • USMI president Lindsey Johnson was in the news, with an op-ed in The American Banker and a Q&A in DS News, both on risk sharing.

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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.

 

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Article: Risk Sharing Transactions: Front End vs. Back End

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USMI president Lindsey Johnson recently sat down for a Q&A discussion on risk sharing with DS News. Below is a portion of her discussion.

Lindsey Johnson currently serves as U.S. Mortgage Insurers (USMI) President and Executive Director. Johnson previously served as a Director on PwC’s public policy team, where she engaged policymakers on key public policy issues that impacted the firm. Prior to joining PwC, Lindsey was a former member of the Senate Banking Committee staff as the Minority Staff Director for the Senate Banking Committee’s National Security and International Trade and Finance (NSITF) Subcommittee, and served as Senior Policy Advisor to Senator Mark Kirk (R-Illinois), focusing on noteworthy banking, housing finance reform, and insurance legislation.

What is the difference between front-end risk sharing and back-end risk sharing?

The biggest difference is the fact that upfront risk sharing transactions de-risk the GSEs, or transfer the credit risk from the loans, before they hit the GSE’s balance sheets. Back-end CRTs require the GSEs to warehouse that risk for a period of time, and the GSEs decide what credit risk they’re going to offlay and who the counterparties will be. USMI members have done both, so we would not say that back-end transactions are bad. We actually are very supportive. However, one of the drawbacks or distinctions between the two, specifically back-end CRTs, is that the risk is on the balance sheets on the GSEs is subject to credit swings, which is partially what happened with the widening of the credit spreads at Freddie Mac last month when they experienced a loss.

Other challenges and drawbacks to the back-end transactions is that there is not a lot of pricing transparency to date. Also, smaller institutions have not been able to participate in the transactions. Front-end transactions provider a lot greater pricing transparency and can be accessible for the vast majority of lenders of all types and sizes, so that’s one of the benefits of front-end transactions.

Why do you think the GSEs have engaged in mostly back-end risk sharing to this point?

The FHFA reported in their white paper back in August that since 2012, the GSEs have purchased approximately $3 trillion in mortgage loans, of which just over around 20 percent of the loans—about $667 billion in unpaid principal balance—has been transferred via riskshare, but out of that, less than 1 percent of the risk has been transferred via front-end risk sharing. I think part of the reason, and it’s pretty understandable if this is the case, is that the GSEs can control the process in the entire back-end transfer process. Especially when you consider early versions of STACR (Structured Agency Credit Risk) and CAS (Connecticut Avenue Series) transactions, where they were really designed to move large portions of unexpected loss from the GSEs balance sheet, it makes sense because they were experimenting in the beginning.

Today, the GSEs are a lot better at risk transfer. The products and the markets themselves have started to evolve, and the GSEs are starting to transfer both expected loss and catastrophic loss. The products have evolved and the market players themselves are able to transfer this risk pretty seamlessly. It’s becoming a part of their everyday routine. So at least in the beginning, it seems, they were experimenting and trying to control the entire process.

Now that we have a much better sense of how this works operationally and how credit risk transfer can work both on the back end and the front end, I think we should start focusing on transactions that are scalable and repeatable just as FHFA continues to say they want to do. Also, they should lay the groundwork for a system that is accessible to a majority of market players. It doesn’t make sense to return to a system that advantages some market players over others. Knowing that comprehensive housing finance reform isn’t coming in the near term, we think it’s imperative that FHFA and the GSEs adhere to principles that nearly every industry and consumer group, as well as policy makers, have said are really critical to the housing finance system going forward. They need to begin laying the groundwork now. Those principles are very broad, of course: having greater private capital, which they are very focused on; greater transparency on pricing, and demonstrating the impact to the borrower; and then equitable access for smaller lenders, and lenders of all sizes and types in mortgage finance. So having a greater balance of front-end transactions is something that we are really pushing FHFA and the GSEs to experiment with in 2016.

To read the entire Q&A discussion with USMI president Lindsey Johnson click here

Newsletter: March 2015

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The recent decision by the Federal Housing Administration (FHA) to lower annual mortgage insurance premiums has renewed the debate about the complementary roles of private Mortgage Insurance (MI) and the FHA government mortgage insurance program.

Below are links to background materials on this topic and excerpts from a related hearing before the House Financial Services Committee Housing and Insurance Subcommittee, which included testimony by Rohit Gupta, President and CEO of Genworth Mortgage Insurance and Chair of U.S. Mortgage Insurers (USMI) and other housing finance experts.

Op-Ed: How Mortgage Insurance Can Improve Credit Access

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USMI Co-Chairs Rohit Gupta and Adolfo Marzol talk about how MI can improve access to credit in this op-ed published in the American Banker this month:

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 How Mortgage Insurance Can Improve Credit Access

headshots of USMI Co-chairs Rohit Gupta and Adolfo Marzol
By Rohit Gupta And Adolfo Marzol
October 10, 2014

Policymakers, consumer advocates and housing industry experts are coming to a consensus that the credit pendulum has swung too far in the aftermath of the housing crisis. Many credit-worthy borrowers — especially first-time homebuyers — are having a hard time gaining access to affordable homeownership opportunities.

In order to improve mortgage credit access while avoiding the risks that led to the last crisis, we must recalibrate the status quo. Private mortgage insurance offers one effective way to make mortgage credit available to more people.

The mortgage insurance industry is vitally important for customers facing prohibitive down payments — one of the biggest hurdles to homeownership for many families. According to the Center for Responsible Lending, middle-income workers such as firefighters and teachers would need to save for approximately 20 years for even a modest 10% down payment on a $158,100 home — the median price in 2010.

For many prospective homebuyers, private mortgage insurance offers real help. It accounts for one of every three recently insured low-down-payment loans. And 43% of all private mortgage insurance loans to purchase a home go to first-time homebuyers, according to data from our trade group, U.S. Mortgage Insurers.

If economic conditions turn adverse, insurance coverage provides lenders with significant protection. And if the loan was sold to the GSEs, private mortgage insurance is in the first-loss position in the event of a default — before taxpayers are put at risk. In fact, since Fannie Mae and Freddie Mac entered conservatorship, private mortgage insurers have covered approximately $43 billion in claims, resulting in a substantial savings to taxpayers.

Recent regulatory changes put the industry in an even stronger position to support our nation’s housing finance priorities.

On Oct. 1, revised master policies developed to meet standards set by the GSEs under the oversight of the Federal Housing Finance Agency went into effect. These policies offer new assurances about mortgage insurers’ consistent handling and payment of claims and greater transparency about the contractual protections for lenders and investors with regards to representations and warranties. These enhanced contracts will give lenders greater confidence to offer home loans backed by private mortgage insurance.

The FHFA is also directing the adoption of updated standards that determine when a mortgage insurance company is eligible to insure loans that the GSEs purchase or guarantee. When finalized, these tougher standards will require insurers to have a minimum of $400 million in liquid assets on hand to pay claims on defaulted mortgages. Ultimately, by establishing more rigorous financial standards and comprehensive business, risk management and operational requirements for mortgage insurance companies, the changes will confirm the long-term value of private mortgage insurance for borrowers, lenders and taxpayers. Members of U.S. Mortgage Insurers are also working with state insurance regulators as they update state insurance laws to incorporate lessons learned from the downturn.

Looking forward, there are even more opportunities for reform. One way to improve housing affordability is for the FHFA to ensure that mortgage insurance is fully recognized when GSE guarantee fees are calculated. We believe that the current fees fail to fully take into account the risk-reducing impact of private mortgage insurance. As a result, consumers are overcharged, putting low- and moderate-income and first-time homebuyers at a disproportionate disadvantage.

Another way to promote responsible homeownership would be for FHFA to restore widespread consumer access to prudently underwritten 97% loan-to-value fixed-rate mortgages made by lenders and sold to the GSEs with private mortgage insurance. Responsibly underwritten low-down-payment loans have a long track record of good performance, and they play a critical role in ensuring broad access to affordable options for qualified borrowers.

Finally, Congress should permanently restore the longstanding tax-deductible treatment of mortgage insurance premiums, which expired at the end of 2013. These premiums are the economic equivalent of mortgage interest payments, which remain deductible.

Ultimately, Congress and regulators should work together to further expand sustainable access to credit while increasing the industry’s reliance on private capital. This latter effort will help protect taxpayers, who bear substantial exposure to mortgage credit losses through the GSEs. Private mortgage insurance is already expanding homeownership access and protecting taxpayers, but there is still more work to be done.

Rohit Gupta, president and chief executive of Genworth Mortgage Insurance, and Adolfo Marzol, executive vice president of Essent, are co-chairs of U.S. Mortgage Insurers.

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Click here to download the full op-ed as a PDF.

Press Release: USMI Applauds Bipartisan Vote Extending Homeowner Tax Relief

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For Immediate Release

April 3, 2014

Media Contacts

Robert Schwartz 202-207-3665 (rschwartz@prismpublicaffairs.com)

Michael Timberlake 202-207-3637 (mtimberlake@prismpublicaffairs.com)

Statement from U.S. Mortgage Insurers (USMI)

“USMI applauds the members of the Senate Finance Committee for voting on a bipartisan basis today to extend vital homeowner tax relief. We are particularly pleased that the bill continues to recognize the tax-deductible treatment of mortgage insurance premiums for low and moderate income borrowers.  We look forward to working constructively with Congress towards enactment of this important tax relief for homeowners.”

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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.

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