Newsletter: December 2023
December 1, 2023
As the year draws to a close, there is no shortage of housing finance policy activity. USMI President Seth Appleton recently authored an op-ed in the Dallas Morning News showcasing the important role that private mortgage insurance (MI) plays in low down payment lending, especially for first-time homebuyers. USMI also released a report on how the private MI industry continues to be a source of strength and resiliency in the housing finance system, and issued statements on the final Securities and Exchange Commission’s (SEC) Conflicts of Interest rule, the Federal Housing Administration’s (FHA) annual financial report to Congress, and the Federal Housing Finance Agency’s (FHFA) appraisal dataset announcement. Read about these developments and more below.
On October 24, USMI President Seth Appleton authored an opinion article in the Dallas Morning News titled, “You can still buy a house with a low down payment.” Appleton noted that despite the competitive housing market in Dallas, Texas, homeownership is still possible for first-time homebuyers thanks to low down payment options such as conventional mortgages with private MI. “The continuous climb in housing prices, especially in a desirable market like Dallas, means that many potential buyers are on a treadmill, always racing to a 20% down payment goal but never making fast enough progress,” said Appleton. “According to USMI’s 2023 [Private] MI by State report, it could take 34 years for a Texas household earning the state median income of $67,404 to save 20% (plus closing costs) for a $354,050 single-family home, the median sales price in the state. Fortunately, nearly 100,000 Texans who became homeowners last year stand as proof that the American dream is achievable through a low down payment mortgage backed by [private] MI. Among those in Texas who used [private] MI in 2022, 62% were first-time buyers who can now put down roots and start to build equity.”
On November 9, USMI released a new report titled, “Private MI: A Source of Strength & Resiliency in the Housing Finance System,” which details the important industry enhancements implemented over the past 15 years that allow private MI to better serve homebuyers, support the housing finance system, and serve as a source of strength in the system through all market cycles.
Upon the release of the new report, USMI President Seth Appleton said, “[p]rivate MI plays a critical role in facilitating homeownership for first-time and low- and moderate-income borrowers while shielding lenders, the government-sponsored enterprises (GSEs), and taxpayers from credit risk. The implementation of important enhancements over the past 15 years has made the private MI industry stronger and more resilient,” adding that “[n]ot only does private MI provide stability to the housing market, but it is also very well positioned to meet borrower demand as proven by the more than 1 million Americans who relied on private MI in 2022 to purchase or refinance a home.”
The report details several of the major enhancements to the industry in the last decade, including updated Private Mortgage Insurer Eligibility Requirements (PMIERs); a new Master Policy; Rescission Relief Principles; and MI Credit Risk Transfer (MI-CRT) structures. The report provides an update on the strength of the private MI industry, which collectively holds $11 billion in excess of required capital, representing a 169% aggregate sufficiency ratio. It also provides an update on the MI-CRT market, noting that since 2015, private MI companies have transferred nearly $73.8 billion in risk on more than $3.4 trillion of insurance-in-force (IIF), including through the issuance of 56 insurance-linked note (ILN) transactions that have transferred nearly $22.3 billion of risk on more than $2.3 trillion of notional mortgages.
On November 27, USMI issued a statement on the SEC’s finalized Securities Act Rule 192, which regulates the prohibition against conflicts of interest in certain securitizations and specifically excluded mortgage insurance-linked notes from being subject to the rule. “USMI applauds SEC Chairman Gensler, the commissioners, and staff for their responsiveness to comments from USMI, federal policymakers, and other market participants by issuing a final rule that reflects the value of input from key stakeholders,” said Appleton. “With today’s final Rule 192, the U.S. housing finance system remains on steady and robust footing as it is confirmed that mortgage insurance-linked note (MILN) transactions, used by private mortgage insurers to source capital markets-based reinsurance, are not impaired in any way by this rulemaking.”
On March 27, the U.S. private MI industry submitted a comment letter to the SEC in response to the Proposed Rule 192, outlining concerns about its potential impact on MILN transactions. On October 20, the industry submitted a supplemental comment letter proposing a new, limited safe harbor to the list of excepted activities to ensure that MILNs are not restricted or prohibited. Federal lawmakers also weighed in on several occasions, including with May 23, 2023 and October 31, 2023 bipartisan letters which urged the SEC to tailor the final rule such that the regulation would appropriately protect investors, but not impact consumers’ access to important financial products such as mortgages.
On November 15, USMI issued a statement in response to FHA’s release of its Fiscal Year 2023 Annual Report to Congress on the financial status of the Mutual Mortgage Insurance Fund (MMIF). USMI President Seth Appleton stated “USMI supports FHA’s continued efforts to maintain the fiscal health of the MMIF. As the most common form of credit enhancement for low down payment lending in the mortgage system, private mortgage insurers recognize the targeted role of FHA and the presence and depth of its taxpayer-funded backstop,” said Appleton. “FHA is an important complement to our industry’s work particularly in serving those who may not have access to homeownership through the conventional market, and its financial health is critical for the housing market.” As policymakers consider actions to address barriers to homeownership, it is critical that there be a coordinated approach to federal housing policies that promotes access to affordable and sustainable homeownership as well as ensures taxpayers are protected from undue mortgage credit risk.
On October 16, USMI issued a statement on FHFA’s publication of the New Uniform Appraisal Dataset (UAD) Appraisal-Level Public Use File (PUF) (UAD Appraisal-Level PUF). “USMI commends FHFA and Director Thompson’s commitment to improving data transparency in the housing finance system. Through the UAD Appraisal-Level PUF, market participants will have greater insight into the government-sponsored enterprises’ (GSEs) valuation data and trends to better assist individual mortgage transactions and guide initiatives to promote affordable and sustainable homeownership,” said Appleton. In February 2021, USMI encouraged FHFA to increase “data democratization” in its response to the agency’s request for information (RFI) on appraisals. In August 2023, USMI reiterated this recommendation in its response to the interagency Notice of Proposed Rulemaking (NPR) on “Quality Control Standards for Automated Valuation Models.”
In November, members of Congress from both the Senate and House of Representatives sent letters to the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) expressing concerns with the Basel III Endgame proposed rulemaking. The letters noted the potential impact the rule may have, as written, on American consumers who continue to struggle with inflation and reduced access to affordable homeownership.
The Senate letter, led by the Committee on Banking, Housing, and Urban Affairs Ranking Member Sen. Tim Scott (R-SC), noted “that, as proposed, Basel III will restrict billions of dollars in capital from those who need it most, resulting in costlier and more limited access to credit for millions of Americans.” The letter continued, “[w]hen it comes to providing mortgages for low- and moderate-income households, this proposal represents a departure from the original 2017 Basel agreement in favor of arbitrary capital increases and a disregard for banks’ ability to offset risk through existing tools like private mortgage insurance, all without providing analytic justification to support these changes.”
The House letter sent by Republican members of the Committee on Financial Services, led by Reps. Scott Fitzgerald (R-WI) and Andy Barr (R-KY), stated that the proposed rule “is unnecessary, not supported by economic conditions, and contradicts statements from yourselves and your colleagues that the banking system is already well-capitalized.” The letter continued, “the proposed approach removes the ability of banks to use private mortgage insurance (MI) to reduce risk weights for low down payment mortgages. This change fails to recognize important enhancements to the MI industry, including stronger capital requirements, updated terms of coverage, and recission relief principles. It also stands in contrast to the Federal Housing Finance Agency’s (FHFA) Enterprise Regulatory Capital Framework that gives capital relief to the Government-Sponsored Enterprises (GSEs) for MI.”
On November 21, the FHFA published a final rule to implement amendments to the Enterprise Regulatory Capital Framework (ERCF), including modifications to the guarantees on commingled GSE securities, multifamily exposures secured by properties with government subsidies, and policies regarding the representative credit score for single-family mortgage exposures. Importantly, the final rule updates the credit score assumption to 680 for single-family mortgage exposures originated without a representative credit score. Further, consistent with USMI’s advocacy, the FHFA did not move forward with the proposed modification to the procedure for selecting a borrower’s representative credit score which would have required the GSEs to average credit scores rather than the current methodology’s requirements to select the median credit score (when 3 are present) or the lower credit score (when 2 are present).
USMI joined the American Bankers Association, Housing Policy Council, and the Independent Community Bankers of America on a May 12th comment letter to the FHFA on the proposed rule to express concerns with the proposed change to the method for calculating a borrower’s representative score and hardwiring bi-merge credit report requirements into the ERCF, cautioning that it “is premature, has significant credit policy implications, and would significantly benefit from a public engagement process that our organizations have previously requested.”