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Proposal Could Disadvantage First-Time, Low- to Moderate-Income, and Minority Homebuyers and the Proposed Treatment of Private Mortgage Insurance (MI) Conflicts with the Strength of the Industry and Federal Housing Regulator’s Assessment of the Robust Credit Risk Protection Provided by MI

WASHINGTON — U.S. Mortgage Insurers (USMI), the association representing the nation’s leading private mortgage insurance (MI) companies, submitted a comment letter in response to a Notice of Proposed Rulemaking (NPR) issued by the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively the Agencies) on the Basel III Endgame proposed rule that would modify capital requirements for banks with $100 billion or more in total assets.

“While USMI supports appropriate capital levels for the safe and sound operation of the U.S. banking sector, excessively conservative capital requirements will have a detrimental effect on our economy and consumers’ access to mortgage loans, especially for minority, low- and moderate-income, and first-time homebuyers,” said USMI President Seth Appleton. “It is critical to modify the proposal to ensure the final rule is analytically justified in terms of the models used, the assumptions made, and the actual risks assumed by banks, while also considering the impact on mortgage financing availability and cost of credit. As written, the proposal fails to recognize the private MI industry’s performance and, in particular, the enhancements made since the Great Financial Crisis.”

In its comment letter, USMI raises the following aspects urging the Agencies to consider and factor them into the proposed rule:

• The proposed rule will harm first-time, low- and moderate-income (LMI), and minority homebuyers. Given the excessively conservative treatment for low down payment mortgage loans, the capital requirements to support these loans would dramatically increase, negatively impacting many first-time, LMI, and minority borrowers who do not have access to intergenerational wealth to afford large down payments at closing. The proposal would increase costs to consumers and/or disincentivize low down payment balance sheet loans, reducing homebuyers’ mortgage options. Furthermore, it would impede the Biden Administration’s goal to promote equity in housing finance and close the racial homeownership and wealth gaps.
• The proposed capital treatment for mortgage loans is excessively conservative. Under the current standardized approach, a mortgage loan held by a bank with a loan-to-value (LTV) ratio that equals or exceeds 90% is given a risk weight of 50% if the loan is protected by private MI. However, the NPR would assign a mortgage loan held by a bank with $100 billion or more in assets with an LTV that exceeds 90% a risk weight of 70%, thereby eliminating the risk mitigating value of private MI. The NPR does not provide any data to justify the large increase in capital requirements for low down payment balance sheet mortgages.
• The NPR fails to accurately value private MI. The NPR fails to recognize the private MI industry’s historical performance and ignores the numerous enhancements undertaken since the Great Financial Crisis. Over the past 16 years, private MI companies have adopted new stringent financial, capital, operational, and quality control standards known as the Private Mortgage Insurer Eligibility Requirements (PMIERs), which were developed under the oversight of the Federal Housing Finance Agency (FHFA). Currently, private mortgage insurers hold 69% more capital than the required regulatory threshold, and the industry collectively holds more than $11 billion in excess of PMIERs requirements. Further, the proposal does not capture the industry’s updated Master Policy and revised Rescission Relief Principles that strengthened terms of coverage and ensure timely payment of valid claims.
• The NPR is inconsistent with FHFA’s Capital Rule. When compared with FHFA’s assessment of single-family mortgage credit risk in the Enterprise Regulatory Capital Framework (ERCF), the proposal takes a divergent view of private MI by not recognizing the financial strength of private MI companies without providing any data to support this. Capital relief for private MI is explicitly considered in the ERCF and it provides for a reduced guarantee fee for low down payment mortgages with private MI.
• The NPR will negatively impact the housing finance system. By reducing consumers’ mortgage options, the proposed rule would cause homebuyers to rely more heavily on mortgage products and programs that are either indirectly or directly backed by the federal government, such as loans insured by the Federal Housing Administration (FHA), for which default risk is 100% guaranteed by the government and therefore U.S. taxpayers. Changes to bank capital rules should not simultaneously decrease borrowers’ options and shift mortgage credit risk from the private sector to U.S. taxpayers. For decades, private MI has provided demonstrable credit protection and the Urban Institute 2023 “Mortgage Insurance Data at a Glance” report concluded that private MI “is highly effective in reducing losses to the GSEs,” as performance data for the 1994-2022 vintages showed that the loss severity for mortgages without private MI was 11.2% higher than for mortgages with private MI.

“We urge the Agencies’ final rule to permit a mortgage loan’s LTV to be reduced through private MI and qualify for a 50% risk weight as is currently allowed, and recognize the value of private MI in reducing credit losses by deploying dedicated, reliable, and resilient private capital in a first-loss position,” continued Appleton. “The private MI industry’s strength should be recognized and incorporated in the proposed rule, and USMI looks forward to continuing to work with regulators to improve the proposal.”

USMI joined the Mortgage Bankers Association (MBA), National Association of REALTORS®, National Association of Home Builders (NAHB), the Community Home Lenders of America, and the Manufactured Housing Institute in signing a joint industry letter to highlight the proposal’s potential impact on access to mortgage credit and affordability for first-time homebuyers and underserved communities. In addition, USMI also joined leading affordable housing advocates, civil rights groups, and housing industry trade associations, including the National Housing Conference, National Urban League, NAACP, UnidosUS, and MBA, to urge the reconsideration of the NPR. Recently, USMI released a report detailing the critical enhancements the private MI industry has undertaken over the past 16 years, allowing it to better support the housing finance system.

For 67 years, the private MI industry has served lenders, the government-sponsored enterprises (GSEs), the U.S. government, and taxpayers as an effective and resilient form of private capital, standing as the first layer of protection against credit risk and mortgage defaults, while enabling access to mortgage credit for borrowers without large down payments. Since 1957, private MI has enabled affordable, low down payment homeownership for more than 38 million people. In 2022 alone, more than 1 million borrowers purchased a home or refinanced a loan with private MI, accounting for nearly $402 billion in mortgage origination volume.

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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.