Op-Ed: PMI is good for first-time buyers and housing finance system
By Seth Appleton, President of USMI
Homeownership remains at the core of the American Dream. After all, it improves financial security, enhances family and community stability, and builds intergenerational wealth. The Federal Reserve’s 2019 Survey of Consumer Finances found that the median net worth of a homeowner is approximately $255,000 — more than 40 times that of a renter.
First-time homebuyers are the driving force of the housing market and typically utilize low down payment mortgages to achieve homeownership. The benefits of homeownership only accrue if first-time buyers can both successfully purchase a home at a reasonable price and remain in it for the long-term, weathering various economic cycles.
However, buyers are contending with rising interest rates, high home prices and constrained inventory. This environment requires policymakers to double down on the same philosophy private mortgage insurers embody every day: the dual pursuit of facilitating affordable, sustainable access to homeownership while also ensuring systemic safety and soundness.
At a time when the banking system is making headlines, housing finance regulators should appreciate the strength, stability and resilience of the conventional mortgage market backed by private mortgage insurance. It has enabled first-time, low- to moderate-income borrowers to secure affordable mortgage financing since 1957 while protecting taxpayers from mortgage credit risk.
Amassing a large down payment is not an option for many households and waiting on the sidelines of the housing market could cost them the chance to build equity, lock in housing costs for the long term and put down roots. Fortunately, through the backing of private capital, first-time and low- to moderate-income buyers can qualify for home financing with as little as 3% down in the conventional mortgage market, and begin to build equity and long-term wealth rather than waiting years to enter the housing market with a 20% down payment.
In 2022, first-time buyers made up more than 60% of low down payment purchases in the conventional market and more than 40% had incomes below $75,000, according to data from Fannie Mae and Freddie Mac. Last year, the average down payment for first-time buyers was 6%.
Low down payment mortgages are not just attractive to borrowers, they are a key component of the conventional market backed by the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, and supported by thousands of mortgage lenders across the country. According to the Urban Institute, conventional, privately insured mortgages experience lower loss severity than GSE loans without private MI despite their higher loan-to-value (LTV) ratios.
Today, roughly $1.5 trillion in mortgages are backed by private mortgage insurance. Additionally, the risk protection from MI structurally stands in a first loss position ahead of the lender and the GSEs to absorb any default-related losses before others in the system do.
Every claim dollar paid by a private mortgage insurer is generally one that neither Fannie nor Freddie, nor potentially taxpayers, need to pay.
Indeed, the prudent risk management, strong underwriting, and robust regulatory requirements of mortgage insurers instituted since the late 2000s and in collaboration with the Federal Housing Finance Agency (FHFA) have resulted in a consistently strong performing low down payment conventional mortgage market.
First-time homebuyers have historically propelled the American housing market forward. Despite challenges in the current market, first-time buyers today still benefit greatly from the availability of low down payment mortgage credit backed by private capital. And in an environment in which affordability is a paramount issue, research from Fannie Mae finds that private MI is one of the smallest components of the cost of buying and owning a home.
Policymakers should pay close attention to the successes of private mortgage insurance since the Great Recession and ensure the housing finance system continues to recognize its role in promoting a housing market in which access to affordable homeownership complements and promotes safety and soundness. This approach will ensure that first-time buyers can continue to reliably participate in the American Dream, while protecting taxpayers from unnecessary risk.
Seth Appleton is the president of the U.S. Mortgage Insurers. He previously served as the Assistant Secretary for Policy Development and Research at HUD and as the Principal Executive Vice President of Ginnie Mae.
This piece was first published in HousingWire on April 14, 2023.