Private Mortgage Insurance Plays a Critical Role Housing Finance Reform
By Lindsey D. Johnson
The year 2019 is already shaping up to be significant for the debate on the future of the housing finance system. With the Administration’s pick for Federal Housing Finance Agency (FHFA) Director Mark Calabria likely to be confirmed in the coming weeks, there has been a renewed focus on the futures of Fannie Mae and Freddie Mac (the GSEs) and the need for reforms. Just last month, Senate Banking Committee Chairman Mike Crapo (R-ID) released an outline on housing finance reform. House Financial Services Committee Chairwoman Maxine Waters (D-CA) has also detailed her legislative priorities, which includes housing reform and a particular focus on affordable housing issues. U.S. Mortgage Insurers (USMI) agrees with Chairman Crapo, Chairwoman Waters, and other policymakers who continue to see the need for meaningful reforms to address structural concerns at the GSEs. While the Administration can take steps to provide the necessary oversight of and enhancements to the GSEs, structural reform must be done by Congress.
This week, I will join other witnesses to testify on behalf of USMI on Chairman Crapo’s outline for housing finance reform and will specifically highlight the important role that private mortgage insurance (MI) plays each day to help middle-income and first-time buyers to become homeowners despite modest down payments. Not only does private MI help to provide access to mortgage credit for American homebuyers, but it also provides important protections for the overall mortgage finance system, which translates to protections for the federal government and taxpayers. Here is why private MI serves a valuable role.
MI Helps Low Down Payment Homebuyers
Private MI is a time-tested way to help borrowers qualify for low down-payment home financing. Research by the National Association of REALTORS® shows that Americans continuously cite saving for a down payment as one of the biggest hurdles for attaining homeownership and first-time homebuyers on average have a down payment of seven percent. Private MI helps bridge the gap for many borrowers to attain homeownership sooner than they otherwise would. In fact, for the past three years, private MI has been the leader in the total insured market to provide borrowers with to access to low down payment mortgage financing. All told, for over 60 years private MI has helped nearly 30 million families nationally purchase or refinance a home, with more than one million borrowers alone in 2018. Of those borrowers, nearly 60 percent of purchase loans went to first-time homebuyers and more than 40 percent of borrowers with MI had annual incomes below $75,000.
MI Protects Taxpayers and Government from Risk
Private MI not only provides affordable access to credit for homebuyers, but it also plays a critical role in protecting U.S. taxpayers from mortgage credit risk in the event of borrower defaults. Private MI serves as the first layer of protection in the conventional mortgage market against defaults that may occur on GSE-purchased mortgages. Private MI attaches to a loan the day that the loan is originated, which means that even before the lender might sell the mortgage into the GSE-backed secondary market, it is protected by private capital and therefore doesn’t directly expose the government. In this regard, when it comes to insuring low down payment mortgages, MI serves as a “second pair of eyes” on that risk. This helps ensure borrowers are placed into sustainable homeownership and adds an additional layer of protection in the mortgage finance system. This loan-level credit enhancement that attaches to the loan at origination is a feature that should be maintained in a future housing finance system.
Mortgage insurers have strong incentives to actively manage this mortgage credit risk because when a conventional-insured mortgage defaults, private MI bears the first layer of financial loss (on average 25 percent of the mortgage value). This structure of MI protection has been effective and, according to the Urban Institute, for GSE “30-year fixed rate, fully documented, fully amortizing mortgages, the loss severity of loans with private MI is 40 percent lower than that without, despite the higher Loan-to-Value of mortgages with private MI.”
It’s been over 10 years since the 2008 financial crisis, which prompted the federal government to place the GSEs into conservatorship. Comprehensive housing finance reform is long overdue and as Congress and the Administration move forward with this important work, private MI looks forward to continuing to play its invaluable role in providing access to credit and unparalleled taxpayer protection.