Letter: Comments on FHFA’s 2022-2026 Strategic Plan

On March 11, 2022, USMI submitted a comment letter to the Federal Housing Finance Agency’s (FHFA) Acting Director Sandra Thompson on the agency’s draft Strategic Plan for Fiscal Years 2022-2026. USMI supports the overarching goals articulated in the Strategic Plan to: (1) secure the government sponsored enterprises’ (GSEs) safety soundness; (2) foster housing finance markets that promote equitable access to affordable and sustainable housing; and (3) responsibly steward the FHFA’s infrastructure. USMI offered additional recommendations and observations, including that FHFA should work in concert with the Federal Housing Administration (FHA) to ensure that pricing promotes borrower choice and allows the GSEs to advance access and affordability in the housing finance system, and that FHFA should implement policies that allow industry participants and consumer advocate organizations to serve as partners to the GSEs on initiatives that aim to promote equitable housing, address barriers to homeownership, and continue prudent risk management. Read the full letter here.

Letter: Comments to CFPB on HDMA Rule Assessment

USMI submitted a comment letter to the Consumer Financial Protection Bureau (CFPB) in response to its Request for Information (RFI) on the assessment of the 2015 Home Mortgage Disclosure Act (HMDA) Rule. In the letter, USMI discusses the importance of the HMDA Rule in eliminating lender discrimination and its value in monitoring how regulatory changes impact who receives mortgages. USMI believes that the benefits of the HMDA Rule’s expanded reporting requirements, including for compliance personnel and technology systems, outweigh the incremental costs for mortgage lenders to comply with the rule. We encourage the CFPB to work with the FHFA to expand analytical capabilities by publicly releasing more granular loan-level mortgage origination data. Click here to read the full letter.

 

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. 

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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. 

Press Release: USMI Submits Comment Letter on FHFA’s Request for Input on Enterprise Equitable Housing Finance Plans

WASHINGTON — U.S. Mortgage Insurers (USMI), the association representing the nation’s leading private mortgage insurance (MI) companies, submitted a comment letter to the Federal Housing Finance Agency (FHFA) on its Request for Input (RFI) on “Enterprise Equitable Housing Finance Plans” (the Plans), which articulates a framework by which the government-sponsored enterprises (GSEs or Enterprises), Fannie Mae and Freddie Mac, will be required to prepare and implement three-year plans to advance equity in housing finance.

“USMI commends the FHFA for soliciting feedback on the Plans to identify the barriers to sustainable housing opportunities, set goals to address those barriers, and implement policies to address them. The private MI industry welcomes the opportunity to work with FHFA, the GSEs, and other housing finance stakeholders to support the Biden Administration’s goal of a comprehensive approach to advancing equity for all,” said Lindsey Johnson, President of USMI. “As an industry that is dedicated to the U.S. housing finance system and exclusively serves homebuyers with limited access to funds for large down payments, USMI and its member companies are keenly interested in advancing policies that promote access to the conventional mortgage market and support sustainable homeownership.”

In order to address longstanding inequities in the housing finance system, USMI encourages the GSEs to explore and implement geography- (including historically redlines areas, areas of concentrated poverty, and rural areas) and income-based initiatives to expand minority homebuying opportunities in the conventional mortgage market.

On behalf of the private mortgage industry, USMI routinely engages with policymakers to sustainably expand access to homeownership and address barriers that disproportionately impact minority homebuyers. USMI believes that the following actions represent viable policies to promote sustainable homeownership and level the playing field for minority homebuyers:

  • Review and Reform Loan-Level Price Adjustments (LLPAs): As 2008-era LLPA fees remain in place and continue to be disproportionately paid in the form of higher interest rates by low- and moderate-income (LMI) and minority borrowers, USMI urges the FHFA to review and reform LLPAs. Changes in the LLPA framework should account for the numerous improvements in the housing finance system since LLPAs were introduced in 2008, promote access to affordable conventional mortgages, and appropriately balance the credit risk being assumed by the GSEs.  Given all of the significant improvements in mortgage lending and risk management, USMI supports a holistic review of GSE pricing, including LLPAs, and the current level of cross-subsidization to support LMI homebuyers.
  • Review and Revise the Enterprise Regulatory Capital Framework (ERCF): As stated in USMI’s August 31, 2020 comment letter, USMI supports FHFA’s efforts to establish capital standards for the GSEs that appropriately reflect their activities and risk exposures to ensure that capital requirements do not arbitrarily price prospective homebuyers out of the conventional mortgage market. As entities with congressionally-mandated public missions, the GSEs’ capital requirements should promote an appropriate level of cross-subsidization and support LMI borrowers. USMI welcomed FHFA’s September 15 release of a notice of proposed rulemaking (NPR) to amend the ERCF to address two critical elements: (1) the prescribed leverage buffer amount (PLBA); and (2) the treatment of credit risk transfer (CRT) transactions. Ultimately, USMI believes that the proposed changes, coupled with the additional recommendations made by USMI, will more appropriately balance prudent risk management and the level of capital for the GSEs, and their statutory missions. 
  • Modify the Preferred Stock Purchase Agreements (PSPAs): USMI welcomed FHFA’s September 14 announcement on the suspension of portions of the January 2021 PSPA amendments, most notably the caps on the acquisition of “high-risk” loans. USMI encourages the agency to remove, and not merely suspend, the provisions concerning the so-called “high-risk” loan acquisition caps that disproportionately impact minority access to conventional mortgages.
  • Finalize the New Products and Activities Rule: While innovation can be beneficial for expanding homeownership opportunities, USMI highlights the need for a transparent and thorough regulatory mechanism to assess new GSE activities and products to ensure they do not disintermediate other market participants. USMI is encouraged by FHFA’s ongoing review of the GSEs’ pilots, activities, and products to ensure they align with the Enterprises’ explicit public policy objectives in compliance with their charters. USMI believes that new products, activities, and pilots should only be allowed when there is clear and compelling evidence that the GSEs are needed to fill a market void that the private market cannot meet.
  • Greater Data and Transparency: To address longstanding inequities in the housing finance system, USMI strongly believes that consistent transparency should be hard-wired into the GSEs’ credit policies and that data around the Enterprises’ performance in key areas, most notably access to credit for minority households, should be publicly available. As noted in USMI’s comment letter, the association firmly believes that additional transparency and data sharing initiatives will enable market participants to enhance access, affordability, and sustainability in the mortgage markets. 

“USMI fully supports increased public-private collaboration along with advancing a coordinated housing policy that ensures all borrowers have access to mortgage products in both the conventional and government-backed markets while maintaining safe and sound operations at the GSEs. Policymakers and stakeholders should work together to implement policies that promote access to sustainable housing finance credit to ensure the ability of consumers to purchase and stay in their homes.”

USMI’s full comments on the FHFA’s RFI on the Plans can be found here.

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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.

Letter: Comments on CFPB’s Advance Notice of Proposed Rulemaking on the Qualified Mortgage Definition

WASHINGTON Lindsey Johnson, President of U.S. Mortgage Insurers (USMI), today released the following statement on the organization’s comment letter submitted in response to the Consumer Financial Protection Bureau’s (“the Bureau”) Advance Notice of Proposed Rulemaking on the “Qualified Mortgage (QM) Definition under the Truth in Lending Act (Regulation Z).”

“As takers of first-loss mortgage credit risk with more than six decades of expertise and experience underwriting and actively managing that risk, USMI members understand the need to balance prudent underwriting with a clear and transparent standard that maintains access to affordable and sustainable mortgage finance credit for home-ready borrowers. The upcoming expiration of the temporary QM category, often referred to as the “GSE Patch,” provides an important opportunity for the Bureau to assess what has developed within the marketplace since the enactment of the QM Rule. Notably, mortgage lending has been done with far greater diligence by market participants to ensure consumers have a reasonable ability-to-repay (ATR) and has resulted in a much stronger housing finance system. Further, the GSE Patch has played a critical role in maintaining credit availability. In our comments to the Bureau, we offer specific recommendations for replacing the current GSE Patch to establish a single transparent and consistent QM definition in a way to balance access to mortgage finance credit and proper underwriting guardrails to ensure consumers’ ATR. USMI’s recommendations include:

  • Maintaining the ATR and product restrictions as part of any updates to the QM definition to ensure discipline in the lending community and to protect consumers;
  • Retaining specific underwriting guardrails such as the current debt-to-income (DTI) component of the QM definition, but modifying the specific threshold to better serve consumers; and
  • Developing a single set of transparent compensating factors for loans with DTIs above 45 and up to 50 percent for defining QM across all markets, similar to how the GSEs, FHA, and VA use compensating factors in their respective markets today.

“Retaining specific thresholds in measuring a consumer’s income, assets, and financial obligations better serves consumers and ensures that the statutory and regulatory intent of measuring a consumer’s ATR is met. Further, adjusting the current DTI limit from 43% to 45% for all loans, and up to 50% for loans with accompanying compensating factors creates a more transparent and level playing field that provides greater certainty for borrowers and lenders and reduces the impact of the expiration of the GSE Patch. USMI believes that the development of a single transparent industry standard will facilitate greater consistency across all lending channels and ensure there is not market arbitrage to achieve QM status.

“USMI applauds the Bureau for undertaking the necessary process for updating this critical rule that is aimed at enhancing lending standards and consumer protection. We look forward to working with the Bureau as it seeks to implement any changes to this important rule.”

Following the release of the Bureau’s ANPR in July, USMI published a blog with observations and recommendations for replacing the GSE Patch.

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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.

 

Letter: Infrastructure Bipartisan Senate Group on Usage of G-Fees

USMI joined a coalition of other housing finance organizations, including National Association of REALTORS® and National Housing Conference, in sending a letter to the bipartisan Senate group negotiating infrastructure framework. In this letter, the coalition requested that lawmakers refrain from utilizing Fannie Mae and Freddie Mac (the government sponsored enterprises or “GSEs”) guarantee fees (“g-fees”) as a source of funding offsets. As representatives of institutions that span the entire housing finance ecosystem, the coalition reaffirmed the belief that g-fees should only be used as originally intended: as a critical risk management tool to protect against potential mortgage credit losses and to support the GSEs’ charter duties. Read the full letter here.

Letters to Congress: MI Premium Deductibility Proposal

USMI joined Mortgage Bankers Association, National Association of Home Builders, and National Association of REALTORS® in submitting letters to Chairman Richard Neal and Ranking Member Kevin Brady of the House Committee on Ways and Means as well as Chairman Ron Wyden and Ranking Member Mike Crapo of the Senate Finance Committee. The letters recommend that the mortgage insurance premium tax deduction be made permanent and the adjusted gross income (AGI) phaseout be eliminated. The current phaseout represents a burdensome eligibility criterion for American families to claim MI deduction and millions more homeowners would benefit from a permanent extension that eliminates the AGI phaseout. As affordability remains a persistent barrier to homeownership across the country, permanently making the MI premium tax deductible and eliminating the AGI phaseout would support both existing homeowners as well as prospective homebuyers.

Letter: Comments on Credit Risk Retention Rule

USMI joined with several other housing and finance organizations to submit a comment letter to banking and housing regulators on June 11, providing observations and recommendations with respect to the review of certain provisions of the Credit Risk Retention Rule. The rule was issued by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, the Federal Housing Finance Agency, and the Department of Housing and Urban Development. Following careful analysis of the changes issued by the CFPB in its final QM rule, the organizations expressed strong support for the continued alignment of the QRM and QM frameworks. The letter affirms that the alignment between these frameworks facilitate a stable housing market and ensures access to conventional mortgage credit for borrowers across the country, including low‐ and moderate‐income and underserved households, and first‐time homebuyers.

Comment Letter: CFPB on QM Compliance Delay and GSE Patch Extension

USMI submitted a comment letter to the Consumer Financial Protection Bureau in response to its Notice of Proposed Rulemaking (NPR) to delay the mandatory compliance date of the December 2020 General Qualified Mortgage (QM) final rule and the extension of the Temporary GSE QM category (GSE Patch). In the letter, USMI discussed both the interplay between the proposed extension of the GSE Patch and the January 2021 amendments to the Preferred Stock Purchase Agreements (PSPAs) as well as the value of increased monitoring and access to mortgage underwriting data for policymakers and housing finance stakeholders. USMI urged the Bureau to work expeditiously with Treasury Secretary Janet Yellen and Federal Housing Finance Agency Director Mark Calabria to further amend the PSPAs to restore authority for the GSEs to acquire mortgages in reliance on the GSE Patch. See the full letter here.

Letter: Comments on FHFA RFI on Appraisal-Related Policies

The Honorable Mark A. Calabria
Director Federal Housing Finance Agency
400 7th Street SW Washington, DC 20019

Dear Director Calabria:

On behalf of U.S. Mortgage Insurers (USMI) and our member companies, we appreciate the opportunity to provide feedback on the Federal Housing Finance Agency’s (FHFA) initiatives to modernize appraisal processes and to the specific questions presented in the Request for Information (RFI) on Appraisal-Related Policies, Practices, and Processes. As a general matter, the private mortgage insurance (MI) industry understands and agrees with the FHFA that there are opportunities to modernize appraisal processes and to improve the quality of residential property valuation practices. There have been significant advancements in technology, data aggregation, and analytics throughout the mortgage finance industry that have positively impacted many professions and processes. Collateral risk assessment and real estate valuation can benefit from these same technological advancements if done appropriately. As Fannie Mae and Freddie Mac, collectively the government-sponsored enterprises (GSEs), seek to modernize their appraisal policies and collateral valuation technologies, USMI strongly believes that the FHFA should implement rules designed to ensure that innovations around the appraisal process are done when there is demonstrable benefit to the broader housing finance system, including greater transparency, efficiency, accuracy of property valuations, and lower costs for borrowers and market participants. While we provide specific comments, observations, and recommendations to many of the issues raised and questions posed in the RFI in our responses in Appendix A, our initial comments below focus primarily on the increased use of appraisal waivers through 2020, as well as specific observations related to the above 80 percent loan-to-value (LTV) segment of the market and recommendations to address areas of increased risks.

Balancing Innovation & Prudent Mortgage Lending

USMI and our member companies recognize that there is an opportunity through appraisal modernization to address many of the existing challenges within the appraisal process, including those that stem from the shortage of qualified appraisers in the market and the unique challenges in rural markets of getting appraisers and having comparable properties for valuations. Given the standardization role that the GSEs play within the marketplace, as well as their dominant market presence, there is an opportunity for industry stakeholders and the GSEs to come together to promote appropriate solutions that drive efficiencies and lead to more accurate valuations in a way that appropriately balances risk and operational flexibility.

At the same time, USMI members continue to appreciate the role of appraisers in the mortgage underwriting process, especially since automated or model-based solutions may not be appropriate for certain properties and transactions. Importantly, for homebuyers, an appraiser’s inspection report serves to affirm, when appropriate, the reasonableness of home price discovery via an arms-length negotiation.

USMI members also acknowledge that appraisal technology has the potential to improve the efficiency of the mortgage underwriting process, however it is critical that there be appropriate transparency, monitoring, and governance. Modernization should be accompanied by guardrails to minimize the risk of incorrect collateral valuation outcomes and any adverse effects on mortgage underwriting. Further, model weaknesses and discrepancies, and ways to mitigate for those weaknesses, should also be considered for determining when and how to use these technologies. It is important that FHFA establish policies that ensure collateral valuation, including the use of competing technologies, such as the two GSEs’ collateral valuation tools, are not a source of competition between the GSEs. When used inappropriately, these tools have the potential to increase risk beyond their expected benefits to the housing finance system.

Many of the ongoing appraisal modernization efforts by the GSEs have led to general process improvements, however it is very important to recognize that automated valuation models (AVMs) and other alternatives to a full appraisal are not appropriate for every property or transaction. USMI believes they should be used in limited circumstances, and only with appropriate guardrails, particularly for higher LTV mortgages where risk is higher and valuation errors may have greater significance.

Data Democratization

The GSEs’ appraisal modernization initiatives have significantly expanded data requirements during the mortgage origination process, with the burden often falling on lenders, mortgage insurers, and other market participants to provide data that informs mortgage underwriting. Industry stakeholders have worked closely with the GSEs since the 2010 launch of the Uniform Mortgage Data Program (UMDP) to implement data collection procedures and technologies to provide data to the GSEs. Despite industry’s commitment to the UMDP and increased data integrity of the Uniform Residential Appraisal Report (URAR), market participants currently do not have a great deal of access to this important data repository. Access to this data would improve market participants’ operations, ultimately benefitting homebuyers and the strength of the housing finance system.

USMI recommends that the FHFA initiate a process to make collateral valuation data available to the parties that contributed to the analysis and that are part of the underwriting process, including appraisers and appraisal management companies, lenders, private mortgage insurers, title insurance companies, investors, and data analytics providers. Greater insight into the GSEs’ collateral valuation technologies and processes will assist with analyses of individual mortgage transactions. Further, the FHFA should implement policies that require the GSEs to share more information about their AVMs, including the tolerances that are incorporated. Data democratization will greatly enhance transparency within the housing finance system and improve risk management practices and strategies across the market.

GSE Appraisal Waiver Policies

One element of the GSEs’ appraisal policies, practices, and processes that we believe warrants particular attention is the expanded use of appraisal waivers for high LTV refinance transactions. While both GSEs have had appraisal waiver programs for nearly a decade, specifically with some of the changes made during 2020, there has been a significant expansion of these programs during the mortgage underwriting process. The share of GSE-backed mortgages receiving appraisal waivers has surged, including a dramatic increase in the use of appraisal waivers for higher LTV loans.

As an industry that is exclusively focused on high LTV mortgage originations, USMI welcomes the opportunity to share our observations concerning the expansion of appraisal waivers in that segment of the market. Appraisal waivers can materially impact LTV ratios and the pricing and risk assessments associated with the GSEs’ guarantee fees, MI premiums, and loan-level capital requirements.3 Importantly, these considerations are more acute for higher LTV loans since the margin of error is slim for these mortgages and could expose the GSEs and the housing finance system to greater credit risk.4 Inaccurate valuations that result from appraisal waivers could enable delivery of loans with LTVs that arbitrarily – and inappropriately – misprice or eliminate MI credit risk protection. Additionally, automated and index-based valuations rely on broader price trends that can overshadow local or property-specific conditions that would point to higher LTVs. Furthermore, the different approaches to appraisal waivers by the two GSEs create frictions that appear to be incentivizing undesirable lender behaviors and further exacerbating these risks.

Industry Observations – Overall Increase in Appraisal Waivers

While the use of appraisal waivers has increased since the onset of the COVID-19 pandemic, the uptick was most notable when the GSEs expanded appraisal waiver eligibility to mortgages with LTVs up to 90 percent in the spring of 2020. Despite the changes that allowed for the significant increase of appraisal waivers, there was little transparency of data around why these changes were necessary, what outcomes they might have, and what guardrails were in place. In January 2020, approximately 85 percent of 80.01-90 percent LTV, rate/term refinance loans at the GSEs received full appraisals and only 15 percent of loans received appraisal waivers, exclusively through Fannie Mae’s program.5 There was a significant decrease in mortgages with full appraisals throughout 2020 and by October 2020, only about 50 percent of GSE-backed 80.01-90 percent LTV, rate/term refinance mortgages received full appraisals.

Industry Observations – AUS Shopping

As a general matter, USMI believes FHFA and the GSEs should establish clear guidelines to ensure that collateral valuation, including the use of different appraisal methodologies and models, is not a source of competition between the two GSEs. Following an internal study of “repeat address transactions” (i.e., transactions where data on the most recent valuation and a prior valuation are available), USMI member companies have noticed significant – and in some respects concerning – differences in valuations between the two GSEs’ respective appraisal waiver programs. FHFA should be mindful of the potential for systemic overvaluations with one of the GSEs’ programs when benchmarked to a local housing price index (HPI) and recognize the lack of transparency around the GSEs’ valuation technologies. This could manipulate the mortgage market and result in lenders’ increased utilization of a specific GSE’s automated underwriting and collateral valuation systems to receive favorable property valuations.

USMI members have also observed, and shared our observations with FHFA, that some lenders appear to be “AUS shopping” to optimize loan execution by testing Fannie Mae’s Desktop Underwriter (DU) and Freddie Mac’s Loan Product Advisor (LPA) for a potential appraisal waiver valuation “advantage.” Our industry has seen compelling evidence that lenders are increasingly running loans through both AUSs to determine which one allows the most “advantageous” property valuation. It is important to note that each GSE conducts a validation when it assesses its own model, a process that does not make presumptions about the other GSE’s model and where it may fail. Applying the two models to the same loan is inconsistent with how they’re validated and effectively undermines the credibility of the GSEs’ own validation processes. The GSEs themselves are aware of the “gaming” potential and USMI strongly encourages the GSEs to take actions to address this concern and prevent inappropriate gaming that might occur through the use of the appraisal waiver valuations.

Industry Observations – Compensating Factors for Appraisal Waivers

USMI members have conducted a forensic analysis of loan files with appraisal waivers and found that both GSE appraisal waiver programs consistently missed adverse site conditions that would have been apparent to a trained appraiser. A primary drawback of appraisal waivers is that they miss critical property data during the valuation process that should be collected and analyzed as part of the underwriting process. While property data need not be concurrent with a refinance transaction, recent data is important to industry participants, especially those with a vested interest in mortgage credit risk post-closing.

While the use of appraisal waivers has dramatically increased, there has been minimal transparency concerning whether the GSEs have specific credit policies regarding loan eligibility for their respective appraisal waiver programs. The expanded use of appraisal waivers should be accompanied by a transparent set of compensating factors for determining loan-by-loan waiver decisions. Data from 2020 suggests that at least one of the GSEs takes into account debt-to-income (DTI) ratio, credit score, and whether the borrower has a prior full appraisal on file. USMI believes these types of overlays are appropriate to mitigate the incremental risk of appraisal waivers. While not directly tied to collateral valuation, weaker DTIs and credit scores may correlate to deferred maintenance and property condition issues that go undetected when appraisal waivers are utilized.

Property data collection is a particularly important part of the valuation and underwriting processes. One appropriate guardrail for mortgages that receive appraisal waivers or other flexibilities would be to require a property inspection followed by a Desktop Review. One of the biggest challenges with the appraisal waiver programs is that property data collection is missed, and this policy would help mitigate the risk associated with underwriting a mortgage without a full appraisal.

Recommendations

Many of the appraisal modernization efforts of the GSEs over the years have led to general process improvements, however it is very important to recognize that AVMs and other alternatives to a full appraisal are not appropriate for every situation. For the reasons outlined above, USMI believes appraisal alternatives should be used in limited circumstances, and only with appropriate guardrails. To better tailor the use of appraisal waivers, it is critical that the GSEs’ programs be subject to robust oversight by FHFA and that strong governance policies be in place to promote transparency and facilitate data sharing with market mortgage market participants. It is especially important that the FHFA implement policies that recognize and speak to the unique risks associated with the use of waiver appraisals in the high LTV segment of the market. As the equity position on a mortgage decreases, the risk of loss severity can increase, and these mortgages cannot merely rely on amortization or home price appreciation (HPA) to guard against risk stemming from incorrect AVM valuations. FHFA and the GSEs should implement policies to address the potential for “gaming” to test and shop appraisal waiver programs to reduce LTVs and/or reduce or eliminate MI coverage requirements. Particular attention should be given to the 80 percent LTV threshold, which is a segment of the market that has historically been the largest contributor of GSE losses. The usage of appraisal waivers to “game” the 80 percent LTV segment to reduce or eliminate MI coverage shifts a greater burden of losses toward taxpayers and away from private capital. Further, while LTV is – to some degree – correlated to loan performance, guardrails such as the presence of compensating factors should be considered to inform policies that pertain to this specific segment of the market.

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USMI appreciates the opportunity to share its views on these important issues with the FHFA. We welcome any questions you may have, as well as requests for data to supplement our observations and recommendations. USMI welcomes efforts by FHFA to properly balance innovation in the housing finance system with the need for transparent standards and appropriate protections.

Sincerely,

Lindsey Johnson
President

View the full letter as a PDF.

Press Release: Private Mortgage Insurers Support Federal Housing Finance Agency Proposed Rule for GSE New Products and Activities

USMI Applauds the Proposed Enhanced Transparency, Oversight, and Review and Encourages Rule Application to All Current Pilot Programs

WASHINGTON — U.S. Mortgage Insurers (USMI), the association representing the nation’s leading private mortgage insurance (MI) companies, submitted its comment letter to the Federal Housing Finance Agency (FHFA) on its Notice of Proposed Rulemaking for New Enterprise Products and Activities, which seeks to replace the 2009 Interim Final Rule that established a process for the government sponsored enterprises (“GSEs” or “Enterprises”) to obtain prior approval for new products and provide notice for new activities.

“USMI is encouraged to see FHFA following its statutory responsibility to establish a much more transparent and appropriate process for considering and approving new GSE products and activities,” said Lindsey Johnson, President of USMI. “The Interim Rule was adopted after the 2008 financial crisis, and as the GSEs continued to play an important and even greater role in the housing market during conservatorship, they at times expanded into new activities that are outside of the secondary market, compete in areas already well-served by the primary market, and not consistent with their mission.”

In its comment letter, USMI welcomes the increased transparency outlined in the proposed rule and supports the inclusion of “pilots” in the criteria for identifying and assessing new activities and products at the GSEs. Considering that numerous prior pilots were developed without meaningful input and analysis from industry stakeholders, USMI believes it is important that the FHFA close the loopholes that could be used again to circumvent the objectives of the proposed framework. USMI urges the FHFA to direct the GSEs to halt all current pilots and, following the implementation of a final rule, require them to submit Notices of New Activity should they want to continue offering such products or programs.

USMI also highlights in its letter the importance of the approval framework ensuring that innovations at the GSEs do not disintermediate private capital and that new activities and products operate in a manner that is within the scope of the secondary market functions set forth in their congressional charters. USMI recommends that the proposed rule be revised to provide additional clarity for the FHFA’s assessment criteria for new activities and products at the GSEs, specifically:

  • The degree to which private market participants are meeting or could meet the needs of the market and consumers, and whether the new activity or product would disintermediate non-GSE market participants;
  • Whether the new activity or product would rely on limited or broad participation by market participants;
  • How certain market participants will be selected over others, whether the activity or product will be made available to other market participants on similar terms, and whether other participants would be harmed by engagement in the activity or product; and
  • Whether the new activity or product would present a conflict of interest for the GSEs, especially where anti-competitive concerns may be present.

“This rule is sound public policy, as it will enhance transparency and provide for the appropriate review of new GSE products and activities to best serve the housing finance system and ensure that government and taxpayers avoid unnecessary new risk,” continued Johnson. “It is imperative that the FHFA continue to establish and enhance its oversight of the GSEs, and this rule is a critical step to that end.”

USMI’s full comments on the FHFA’s proposed rule can be found here.

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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.

Letter: Comments on FHFA Strategic Plan: Fiscal Years 2021-2024

Dr. Mark A. Calabria
Director
Federal Housing Finance Agency
Constitution Center
400 7th Street SW
Washington, DC 20219

Dear Director Calabria:

U.S. Mortgage Insurers (USMI) represents America’s leading providers of private mortgage insurance (MI) and our members are dedicated to a strong housing finance system backed by private capital that enables access to prudent and sustainable mortgage finance. The MI industry has more than 60 years of expertise in underwriting and actively managing mortgage credit risk to balance access to affordable credit with protecting Fannie Mae and Freddie Mac (the GSEs) and the American taxpayer from mortgage credit-related losses. During that time, the MI industry helped more than 33 million households achieve sustainable homeownership, including more than 1.3 million in the past year alone.

On September 22, 2020 the Federal Housing Finance Agency (FHFA) released its “Strategic Plan: Fiscal Years 2021-2024” (Strategic Plan) that establishes goals for FHFA to fulfill its statutory duties as both regulator and conservator of the GSEs. USMI appreciates the opportunity to submit input on the Strategic Plan and provide feedback on the framework and requirements for forthcoming FHFA actions. At a high level, USMI commends FHFA for formalizing the establishment of its new strategic goals to: (1) ensure safe and sound regulated entities through world-class supervision; (2) foster competitive, liquid, efficient, and resilient (CLEAR) national housing finance markets; and (3) position the FHFA as a model of operational excellence by strengthening its workforce and infrastructure. USMI supports these goals and they are consistent with the observations and recommendations outlined in our October 2018 administrative reform report.

A primary goal of the Strategic Plan is to take actions that strengthen the operations and oversight of the GSEs to support their exit from conservatorship. This is consistent with the Administration’s March 2019 “Memorandum on Federal Housing Finance Reform,” which called on the U.S. Department of the Treasury (Treasury) to develop a plan to “End[] the conservatorships of the GSEs upon the completion of specified reforms” and Treasury’s subsequent “Housing Reform Plan” which stated that “In parallel with recapitalizing the GSEs, FHFA should begin the process of ending the GSEs’ conservatorships.” While it will ultimately fall to Congress to complete the difficult work of making permanent and structural changes to the housing finance system, despite a number of legislative proposals over the past 12 years, Congress has yet to pass comprehensive reform. Though congressional action is still needed to provide for the necessary structural reforms, including a transparent and paid-for explicit guarantee of the GSEs’ mortgage-backed securities, the FHFA and Administration can take certain actions to further reduce taxpayer risk exposure, level the playing field, and provide greater transparency regarding GSE pricing and practices—ultimately to put the GSEs and the housing finance system on more stable footing going forward.

Over the summer, the FHFA re-proposed a post-conservatorship capital framework for the GSEs, which you have routinely characterized as the most important rulemaking that will occur during your time as Director. As indicated in our comment letter, USMI urges FHFA to adopt appropriate capital standards for the GSEs and believes that a well calibrated capital framework is a critical reform. However we also strongly believe that additional reforms are necessary, including reforms that reflect the lessons learned during and since the 2008 financial crisis, reduce the GSEs’ duopolistic market dominance, and create long-term safety and soundness in the housing finance system. These reforms, if done correctly, will help to reduce taxpayer risk exposure and ensure that home-ready Americans continue to have sustainable access to prudent mortgage finance credit. Further, actions taken by the FHFA and Administration should help facilitate, not inhibit, Congress’ ability to complete comprehensive housing finance.

As Director of the FHFA, you have previously indicated that the agency “will continue to engage with Treasury to develop a responsible plan to end the conservatorships—with a clear road map and mile markers—and to adjust the Treasury share agreements accordingly.” We are pleased that there are specific “mile markers” and reforms that will have to be met prior to ending the conservatorships of the GSEs. These reforms and mile markers should be met before the GSEs exit conservatorship and are mostly possible if done by the Director of FHFA in his role as conservator. You have stated on a number of occasions your desire and intent to improve competition in the marketplace with the GSEs, noting that “[c]ompetition lowers prices, improves quality, and drives innovation…and ensure[s] no institution is ‘too big to fail.’” However, even if Congress were to provide FHFA the authority to grant charters to new guarantors, for competition to ever exist in the marketplace, the GSEs’ significant market advantages would have to be addressed. Over the decades—and particularly during their more than 12 years in conservatorship—the GSEs have made significant investments in proprietary systems and technologies that have made the mortgage finance system even more reliant on the GSEs. Addressing these vast advantages and implementing these reforms is necessary ahead of allowing the GSEs to build capital and exit conservatorship, where they would otherwise be able to leverage their existing capital and operational advantages to maintain their market dominance.

During conservatorship, stakeholders across the ideological spectrum have put forth a multitude of proposals and recommendations on housing finance reform. While they differ on various details, the proposals and recommendations have a critical similarity among them—they generally recognize that the GSEs should not be recapitalized and released before certain necessary meaningful reforms are completed and made permanent. Further, these proposals also include many common features for what should be considered “mile markers” to be met in advance of ending the net-worth sweep and ahead of the GSEs retaining capital. To varying degrees, many of the leading legislative and Administrative proposals for GSE reform have leaned on a utility-like secondary mortgage market function for the GSEs to reduce their current duopoly and market power in the mortgage finance system. Nearly all such proposals call for capping the GSEs’ rates of return, limiting their scope of activities to secondary market functions, and providing open and transparent access to the GSEs’ data, pricing, and technologies for private market participants, policymakers, and consumers. As to Congress, recent legislative proposals envision a role for the GSEs in a future housing system with an explicit government guarantee at the security level, call for the GSEs to ensure access for smaller lenders, and include transparent affordable housing requirements. These proposals signify that Congress feels there are critical functions currently imbedded in the GSEs and deems these functions/features necessary in a future housing finance system—either within the GSEs or placed in a separate utility or public exchange.

Ultimately, we believe that any actions taken by the Administration should seek to further four key policy objectives: (1) maintain what works in the current system; (2) further reduce taxpayer risk; (3) level the playing field between the GSEs and private market participants; and (4) provide greater transparency regarding the GSEs’ pricing and business practices. At a minimum, prior to the GSEs’ release from conservatorship, USMI urges FHFA to take the following administrative actions to achieve the above stated policy objectives:

  1. Limit the GSEs’ activities to only those necessary for the GSEs to fulfill their intended role of facilitating a liquid secondary market for mortgages, preserving a bright line separation between primary and secondary market activities.

    Objective 2.1 of the Strategic Plan calls on the FHFA to “ensure the activities of the regulated entities stay within the boundaries of their charters and appropriately respond to market events and downturns.” USMI strongly supports policies and supervision that preserve the “bright line” separation between the primary and secondary mortgage markets. It is imperative that the GSEs’ activities be limited to the secondary mortgage market, as stipulated by their congressional charters which explicitly state that their purposes are to “provide stability in the secondary market for residential mortgages; to respond appropriately to the private capital market; to provide ongoing assistance to the secondary market for residential mortgages…; and to promote access to mortgage credit throughout the Nation.” Before the GSEs are released from conservatorship, FHFA should use its authority to implement regulatory guardrails to ensure the GSEs do not encroach on primary market activities and do not disintermediate private market participants. Infringements of the longstanding bright line serve only to increase the GSEs’ market dominance and diminish the role that private capital plays in the housing finance system. For instance, the selection of loan-level credit enhancement has been a function of the primary mortgage market for more than 60 years and it is critical that it remains as such going forward to ensure that a vibrant, competitive private MI market is maintained to benefit taxpayers and consumers, and to prevent greater entrenchment of the GSEs.
  2. Increase transparency around the GSEs’ operations, credit decisioning, technologies, and role in the housing finance system.

    Implementing elements of a utility-like secondary market function for the GSEs, including transparency around their data, technology, and pricing, are appropriate guardrails that can help ensure the GSEs’ activities are within the bounds of their charters. Further, initiatives and technologies at the GSEs, such as those that seek to reduce the use of appraisals for purposes of assessing collateral during the underwriting process, can dramatically increase risk in the mortgage finance system if not done with transparency and in collaboration with other market stakeholders. Innovation, without proper guardrails and transparency, can further hardwire the GSEs’ automated underwriting systems (AUSs) into the broader housing finance system and complicate the prospects and logistics of enacting permanent structural reforms.
  3. Require a “notice and comment period” process and prior approval of new products and activities.

    During their 12 years in conservatorship, the GSEs have developed and introduced programs, products, and pilots with little to no transparency, often representing expansions into areas of the mortgage finance system considered to be functions of the primary mortgage market. This includes pilots for guaranteeing loans for single-family rentals, financing a select group of large non-banks to support mortgage servicing operations, executing lender risk sharing credit risk transfer (CRT) transactions, and utilizing less regulated and capitalized forms of credit enhancement – Fannie Mae’s “Enterprise-Paid Mortgage Insurance” (EPMI) and Freddie Mac’s “Integrated Mortgage Insurance” (IMAGIN). These pilots were introduced into the market without transparency for stakeholders and without a comment period to receive industry input on both the need for the pilots and recommendations to improve their operations. In some cases, they were only made available to a select group of industry participants—generally at the sole discretion of the GSEs, thereby picking winners and losers among industry participants. More recently, FHFA has directed the GSEs to end some of these pilots, and has indicated it plans to release a Request for Input (RFI) or Notice of Proposed Rulemaking (NPR) regarding the prior approval of new products and programs at the GSEs. USMI strongly supports a regulatory mechanism to exercise greater scrutiny of new GSE activities to ensure they support the GSEs’ explicit public policy objectives and comply with their charters. New products, activities, and pilots should only be allowed when there is clear and compelling evidence that the GSEs are needed to fill a market void that the private market cannot meet. A robust approval process that complies with the Administrative Procedure Act (APA) and provides for input from market participants and stakeholders will help ensure that private capital plays a significant role in the mortgage market and prevent the GSEs from being further entrenched in the housing finance system.
  4. Require that counterparty standards be set by the FHFA.

    Objective 2.1 of the Strategic Plan also calls on the FHFA to “establish standards for sellers, servicers, and counterparties to the regulated entities that strengthen the overall function and resiliency of the mortgage markets.” Private MIs are one of the only counterparties that have rigorous capital and operational standards, the Private Mortgage Insurer Eligibility Requirements (PMIERs), set by the GSEs and approved by FHFA, which were finalized through a public comment process. MIs must comply with the PMIERs standards in order to insure loans guaranteed by the GSEs. PMIERs ensure MI counterparty creditworthiness, as well as providing minimum standards for capital, operations, procedures, conflicts of interest, and other controls. USMI supports the FHFA promulgating strong risk-based capital and operational standards for all credit enhancement providers to ensure the availability of first-loss, loan-level credit enhancement across market cycles.

    The Administration has an opportunity to promote greater transparency and oversight of the GSEs and their counterparties and to correct what has proven to be at times a conflicting role that the GSEs play by both setting standards for market participants and then competing against these same private market participants. Lenders and other market participants should feel confident that they can access the secondary market on a level playing field with their competitors, based on clear and transparent standards. While diminished under a more utility-like system, there will still be a conflict for the GSEs to set counterparty standards, as there will continue to be opportunities to arbitrage the rules to compete with the private market and/or to pick winners and losers in the marketplace. A further post-conservatorship complication is that the GSEs may not continue to collaborate on PMIERs updates and the existence of two competing eligibility standards could cause market arbitrage opportunities and market distortions. Therefore, FHFA, under its authority and responsibility as regulator, should remain intently engaged in the development and approval of PMIERs. It is also important that the FHFA create transparent and consistent/comparable standards that promote a level playing field across counterparties.

    Further, consistent with nearly all other federal financial regulatory regimes, the FHFA as a prudential regulator of the GSEs should supervise the GSEs’ risk management processes and financial health. FHFA should use its regulatory authority whenever possible (as opposed to its authority as conservator) to minimize regulatory arbitrage by having a coordinated and consistent oversight approach.
  5. Promote a clear, consistent, and coordinated housing finance system.

    Finally, actions taken by FHFA should increase transparency and consistency, and should reduce, not merely shift, mortgage credit risk in the housing finance system. To accomplish this, the FHFA should work closely with other federal regulators to implement a transparent and coordinated housing policy that facilitates access to credit, promotes prudent mortgage underwriting, and creates a level playing field. Robust coordination between the FHFA, U.S. Department of Housing and Urban Development (HUD), and Consumer Financial Protection Bureau (CFPB) will ensure that borrowers are best served by housing market participants and that the federal government, and therefore American taxpayers, are adequately protected from losses related to mortgage credit risk. Federal policy should clarify which borrowers should be served by the GSE backed market and which are better served by the Federal Housing Administration (FHA). This is consistent with Treasury’s “Housing Reform Plan, which stated that “FHFA and HUD should develop and implement a specific understanding consistent with these defined roles for the GSEs and the FHA so as to avoid duplication of Government support.” Importantly, the GSEs have demonstrated that first-time homebuyers and borrowers with low down payments can effectively be supported by the conventional market. The GSEs and MIs have a long history of facilitating access to affordable and prudently unwritten low down payment mortgages, and conventional loans with private MI have been the preferred option for low down payment borrowers for every year since 2016. These home-ready borrowers should have mortgage options and not be categorically restricted to government-insured programs such as the FHA.

    A primary aspect of promoting a coordinated housing finance system is that the Administration, and FHFA specifically, should advance policies that promote borrowers being served by the conventional market, by private capital, where possible. As stated in our comment letter on the re-proposed Enterprise Regulatory Capital Framework, USMI strongly encourages FHFA to promote private capital standing in front of the GSEs, including through loan-level first-loss protection through entities that can actively manage mortgage credit risk, such as private MIs. Further, the Administration could encourage or require these private entities to disperse credit risk, similar to how private MIs currently operate and use the reinsurance and capital markets to further distribute mortgage credit risk to diverse global sources of capital.

A well-functioning housing finance system should provide consistent, affordable credit to borrowers across the nation and through all parts of the credit cycle without putting taxpayers at undue risk. Fixing our nation’s housing finance system and putting it on a sustainable path is the last piece of unfinished business following the 2008 financial crisis. We urge the FHFA and Administration to pursue the reforms enumerated above to ensure greater taxpayer protection and a more level playing field that enables a more transparent housing finance system and promotes sustainable access and affordability.

Sincerely,

Lindsey D. Johnson
President
U.S. Mortgage Insurers

View the letter as a PDF.