News Filter: Articles & Op-Ed’s

Op-Ed: PMI must play crucial role in housing reform

Posted on by dcadmin

A version of this piece originally appeared on Scotsman Guide on September 25, 2018 and was written by USMI Chairman Bradley Shuster. 

Government-backed conventional mortgages totaled approximately $5.3 trillion as of summer 2018. As every follower of the mortgage finance system knows, the guarantors of this multi-trillion-dollar mortgage credit risk—Fannie Mae and Freddie Mac (the GSEs)—have remained under government control since being placed into conservatorship in 2008.

While GSE reform is contemplated by Congress each year, holistic legislative reform remains elusive. It’s time for our federal elected officials to put the GSEs on a more sustainable path so U.S. taxpayers don’t continue to bear the burden of undue mortgage credit risk.

There is encouraging news, however: some areas of reform have received consistent bipartisan support. The use of private capital to transfer credit risk away from taxpayers is widely supported by housing experts, members of Congress from both sides of the aisle, and the White House. There are a number of ways to do this, and over the past several years, the GSEs have been exploring new programs including transferring second-loss risk (so-called “mezzanine risk”) through credit risk transfer (CRT) transactions.

For over 60 years, private mortgage insurance (MI) has served as a significant means for transferring mortgage credit risk away from the federal government and taxpayers. This is for good reason: private MI is one of the only forms of loan-level credit enhancement positioned in a first-loss position to lenders and the GSEs—transferring the risk before it ever reaches the GSEs’ balance sheets. Private MI has helped nearly 30 million families become homeowners, including many first-time homebuyers and low- to moderate-income borrowers, by allowing them to receive prudently underwritten mortgages with as little as three percent down. In fact, private MI helped more than one million borrowers purchase or refinance a mortgage in 2017 alone and 56 percent of purchase loans went to first-time homebuyers. Further, private MI not only helps put families in homes but also keeps them there by being responsive to troubled borrowers and working with homeowners to avoid default with prudent modifications.

Since the financial crisis, the MI industry has taken important steps to strengthen and enhance its risk protection capabilities, particularly with the new Private Mortgage Insurer Eligibility Requirements (PMIERs) enacted in 2015, which nearly doubled the industry’s pre-crisis capital requirements. The industry has also improved its claims processes through updated Master Policy Agreements, which provide lenders with greater clarity about when and how the industry pays claims. Today, more than $930 billion in GSE mortgages have private MI coverage and the industry has covered more than $50 billion in claims since the GSEs entered conservatorship.

When a mortgage insurer pays a claim, it’s a claim that neither the lender nor taxpayers (for the GSEs) have to shoulder. It’s not just claims though; the MI industry is a leader in mortgage underwriting. As a loan level product, private MI brings to the table a second set of eyes in the underwriting process, which helps to approve low down payment borrowers for home financing while ensuring these borrowers meet today’s prudent lending requirements. This is where private MI has unique advantages over other forms of credit enhancement, and why it’s essential private MI remains a fundamental component of the way the GSEs transfer credit risk in any reformed system.

The GSEs and the Federal Housing Finance Agency (FHFA), as conservator and regulator, are experimenting with other CRT mechanisms as Congress considers reform. These different CRT mechanisms are similar to how mortgage insurers manage and distribute their own credit risk exposures. Importantly, unlike some other forms of opportunistic capital, private MI is consistently available across market cycles, ensuring borrowers will continue to have access to affordable mortgage credit even during bad economies and that taxpayers will consistently have meaningful protection against mortgage credit risk. Importantly, mortgage insurers do not just buy and hold mortgage credit risk. Over the years, the MI industry has demonstrated increasing sophistication in evaluating and managing this long-tail mortgage credit risk. For decades, the MI industry has actively participated in reinsurance transactions in the normal course of business to disperse risk to enhance its capital allocation and manage its own risk exposure.

More recently, the industry has also participated in various capital markets transactions. In April 2017, National MI (NASDAQ: NMIH) successfully completed its first securitization of MI risk with the issuance of more than $200 million of insurance-linked notes and this July announced the pricing of $264.5 million of 10-year mortgage linked notes. These securitizations not only help disperse mortgage credit risk, but also free up capital that can be used to help more borrowers purchase homes. Other MI companies are participating in similar securitizations and these transactions have established the MI industry as a nimble and innovative player in the housing and mortgage sector. Since 2013, U.S. Mortgage Insurers (USMI) members have transferred to the global capital and reinsurance markets $34 billion of risk, covering $160 billion of primary risk written.

What happens during a stressed market cycle is important to consider. The reality is much of what the GSEs have been experimenting with are forms of CRT that are not tied to housing and therefore will be unavailable for this type of mortgage credit risk when the housing sector is under stress. That’s one of the reasons why private MI remains an essential form of risk transfer for the GSEs. If the GSEs were to rely on their own balance sheets or an MI alternative that suddenly became unavailable, the government and taxpayers would be unduly exposed to risk.

And the MI industry is poised and capable of doing even more in any reformed housing system. While it is prudent for the GSEs to transfer second-loss risk into the capital markets, the MI industry remains active in underwriting and managing new credit risk—thereby reducing risk in the overall mortgage finance system—and remains committed to providing credit enhancement that protects taxpayers while ensuring borrowers have access to low down payment lending.
The MI industry and its products are among the most sophisticated and experienced in the housing finance system when it comes to risk management. The MI industry has proven to be unparalleled in its innovation and leadership in promoting homeownership for the last six decades and has much more to offer American homeowners. Lawmakers and policymakers have important work ahead of them to reform the GSEs, and the MI industry stands at the ready to ensure its invaluable services are part of any new system.

Bradley Shuster is the Chairman of the Board and CEO of National MI, and serves as current Chairman of U.S. Mortgage Insurers (USMI).

Article: More evidence of why trying to save 20 percent on a home down payment isn’t realistic

Posted on by dcadmin

By Michael Lerner, Washington Post

“One of the biggest misconceptions associated with buying a home is that you need a down payment of 20 percent of the home price. The median down payment for buyers under age 37, a group that typically includes a majority of first-time buyers, was just 7 percent last year, according to the National Association of Realtors…”

Read More on Washington Post

Op-Ed: GSEs need greater taxpayer protection upfront

Posted on by Lindsey Johnson

 

 

 


By Lindsey Johnson

Eight years after taxpayers provided them with $187 billion, Fannie Mae and Freddie Mac, two of the largest backers of mortgages, remain under government control. While these government-sponsored enterprises (GSEs) are healthier today thanks to new safeguards that have improved the stability of the mortgage finance system, the goal is to put the GSEs on a stable footing for the long term.

Efforts to reduce government, and therefore taxpayers’, risk exposure by positioning more private capital in a so-called “first loss” position ahead of the GSEs are widely supported. Several approaches are being tested through an initiative called credit risk transfer (CRT). The vast majority of CRT today occurs after the loans have already been purchased by the GSEs where they hold the risk for some time before selling a portion of it “on the back end” to a third party—primarily asset managers and hedge funds. While it’s positive to see the GSEs seek to shift risk, how this transfer occurs is a question currently vexing policymakers. And, how it is done will have significant implications for the future of housing finance.

The GSEs’ regulator, the Federal Housing Finance Agency (FHFA), recently sought input on CRT, looking specifically at front-end approaches where the risk is transferred to a third party before it reaches the GSEs’ balance sheets. While this may seem novel, there’s a highly effective form of front-end risk transfer that has existed for six decades: private mortgage insurance (MI). MI is a good answer to policymakers’ question of how to further protect taxpayers while ensuring first-time buyers have access to home financing.

Typically, on conventional GSE loans with down payments less than 20 percent, MI covers the first losses before it ever reaches the GSEs. This front-end risk protection has paid off. Since the GSEs were placed into conservatorship, MIs have covered more than $50 billion in claims to the GSEs—risk that taxpayers didn’t need to cover. MI not only protects taxpayers, it helps creditworthy families without large down payments qualify for a mortgage. In the past year, MI has helped more than 795,000 Americans purchase or refinance their home—nearly half were first-time homebuyers and more than 40 percent had incomes below $75,000.

Private MI works—today it covers up to 35 percent of the value of a loan, and because it transfers credit risk at the loan’s origination, it’s a pure form of front-end risk share. The question being considered by FHFA now relates to the expansion of the current levels of private MI. This deeper level of MI can be done in a way that is fair for lenders of all sizes, achieves the objective of reducing taxpayer exposure, and offers pricing transparency, so if there is a savings to the consumer, it can be realized.

Here are some things FHFA and the GSEs should consider for CRT:

First, the housing finance market is cyclical. Therefore, FHFA needs to make sure all CRT structures will be available in the next downturn. Through the financial crisis mortgage insurers continued to pay claims and insure new home loans. The structure of mortgage insurers contributes to economic stability for a number of reasons, including that MI companies engage in countercyclical reserving. This means they reserve premiums collected during favorable economic times so they can pay increased claims during downturns. Mortgage insurers provide credit loss protection exclusively on residential mortgages and, unlike other forms of CRT, won’t exit should the market experience volatility or stress.

Second, new GSE requirements established robust standards for the industry’s capital levels, business activities, risk management, underwriting practices, quality control, lender approval, and monitoring activities. All of this makes MI different from other capital market structures, which disappeared during the crisis and have yet to return in any meaningful volume.

Third, the mortgage finance system cannot return to being controlled by, and benefitting only a few. Unlike other forms of CRT, deeper MI coverage can be made available to lenders without any biases or advantages based on size or volume. It’s simple to implement too, as it is operationally consistent for lenders to use as current mortgage insurance. MI also doesn’t require the posting of collateral, a challenge for some smaller lenders.

Finally, transparency is fundamental to better inform market participants, to make clear if there’s any borrower benefit among the different transaction types, and to enable the formation of a deep market for these transactions. MI pricing is transparent. Rate cards are standardized and published and other reports, including securities and state insurance filings, are publicly available to lenders and borrowers.

Until Congress determines the future of housing finance, FHFA is right to explore ways to transfer more risk away from taxpayers. However, not all risk sharing programs are equally effective. Deeper MI can help our nation build a stronger, more stable housing finance system that protects taxpayers and facilitates the homeownership for millions of Americans.

A version of this article originally appeared in The Hill on October 20, 2016.

Article: Private Mortgage Insurers Make Their Mark on the Industry

Posted on by dcadmin

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.

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

Posted on by dcadmin

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

Op-Ed: How Mortgage Insurance Can Improve Credit Access

Posted on by dcadmin

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:

American Banker logo

 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.