Tag: credit

Statement: March 2017 FHFA Credit Risk Transfer Progress Report and RFI

Posted on by Rhina Portillo

The following statement can be attributed to Lindsey Johnson, USMI president and executive director:

“Private mortgage insurance is a 60-year old bedrock of the housing system that for decades has helped low down payment borrowers qualify for mortgage financing—more than 25 million borrowers to date—and has provided critical credit risk protection to the government and taxpayers through numerous housing cycles. MI works and is a reliable form of credit risk protection, as evidenced by the more than $50 billion in claims that mortgage insurers paid to the GSEs through the downturn. As FHFA states in its progress report, private mortgage insurance remains the primary form of credit enhancement used on mortgages sold to the GSEs with loan-to-value ratios over 80 percent, and in the first quarter of 2017 MI covered $48 billion of mortgages the agencies purchased.

“In the absence of comprehensive GSE reform, FHFA is rightfully exploring options in the credit risk share market through various pilots, and USMI encourages greater balance, transparency, and comparable standards among these options. The cost of credit enhancement has more than doubled for many of the back-end CRT tranches sold, which indicates price volatility continues to be present for these transactions. Our industry remains confident that greater potential benefits can be realized through front-end risk sharing, specifically as outlined in our proposal last year to explore deeper MI coverage, where even more risk is transferred away from the government before it ever touches the GSEs’ balance sheets. The vast majority (more than 97 percent based on risk in force) of CRT transactions to date have been done on the back-end, with the GSEs warehousing credit risk before transferring to the private sector. The GSEs need not carry this level of risk considering there is ample opportunity to increase or at a minimum balance the level of front-end transactions.

“We also encourage equivalent counterparty standards for other CRT transactions, similar to the stringent requirements of mortgage insurers. Doing this will ensure taxpayers are better protected. In the last two years, MIs have materially increased their claims paying ability in both good and bad economic times due to new higher capital standards under the Private Mortgage Insurance Eligibility Requirements (PMIERs).  All MIs have met or exceeded PMIERs requirements as of December 31, 2015.”

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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.

Blog: Private Mortgage Insurance at 60 Years — Lindsey Johnson interviews USMI Board Chairman Pat Sinks

Posted on by Lindsey Johnson

By Lindsey Johnson

What was the driving force in 1957 that led to the inception of private mortgage insurance (MI)?

While the late 1950s was a time of great economic prosperity, the devastating effects of the Great Depression and World War II still impacted how financial institutions viewed risk. These institutions were leery of issuing mortgages with less than 20 or 25 percent down, unless the Federal Housing Administration (FHA) insured them. However, the red tape, expense, and regulations involved in working with the FHA made it impractical for many banks to lend and served as a barrier to homeownership for many low- to moderate-income borrowers. As a result of the precarious mortgage lending situation, a real estate attorney based in Milwaukee, WI named Max Karl sought a way to allow banks to more efficiently serve borrowers with low down payment loan options by insuring home loans with private MI. To do this, Karl founded Mortgage Guaranty Insurance Corporation (MGIC) and the rest is history.

Since 1957, how has private MI helped support homeownership?

Having mortgage insurance makes originating high loan-to-value (LTV) loans safer for the financial institutions we serve, allowing them to reduce their risk and lend to credit-worthy borrowers who bring less than 20 percent down to the table. This allows borrowers to become homeowners sooner than would otherwise be possible. It also allows homeowners to build the kind of long-term wealth that comes with having equity in a home.

Why should borrowers consider private MI?

I encourage borrowers to thoroughly explore all home loan options when buying a home; being well informed is the key to making the best choice based on one’s individual needs. That said, private MI offers an affordable and sustainable low down payment path to homeownership. What’s more, unlike some other low down payment programs, private MI automatically cancels once a homeowner reaches 78 percent equity in his or her home (or 80 percent equity upon request) and meets investor and/or Homeowner Protection Act requirements. This benefit of private MI can save homeowners thousands of dollars over the life of their loan.

How does private MI fit into the mortgage finance system?

Simply put, private MI helps reduce risk in the mortgage financing system by putting private capital in front of taxpayers and the federal government. Private MI does this by meeting a requirement established by Congress that low down payment loans sold to the government-sponsored enterprises Fannie Mae or Freddie Mac (the GSEs) have extra credit protection.

If the borrower defaults on their loan and there isn’t enough equity in the home to cover what is owed on the mortgage, private MI is there to offset the loss. With the GSEs in conservatorship and the government effectively guaranteeing the loans assumed on the GSEs’ balance sheets, taxpayers face direct exposure to mortgage credit losses experienced by the GSEs. When private MI is in place, private capital – not taxpayers – cover the first losses on a default up to certain coverage limits.

To give you an idea of what that means in real dollars, the private MI industry has paid more than $50 billion in claims for losses to the GSEs since they entered conservatorship during the 2008 financial crisis

What’s changed in the private MI industry over the past 60 years?

I like to say “this isn’t our father’s MI.” The private MI industry has been through a lot in its 60-year history. Most recently, we learned some valuable lessons during the Great Recession. Prior to that, the industry had never experienced a coast-to-coast collapse in the housing market. It’s true there have been times of great economic hardship during the industry’s history, but nothing as widespread as this most recent economic downturn.

While the private MI industry’s commitment to helping expand homeownership in an affordable, sustainable way remains steadfast, it has incorporated the lessons learned from the Great Recession into how it operates today. This includes the industry’s capital standards and how it views, evaluates, and prices for risk.

These lessons have made the private MI industry a stronger partner with its customers and it is in a great position for the future.

Speaking of the future, what do you see for private MI going forward?

The private MI industry is in the midst of a once in a generation opportunity to positively reform the country’s housing finance system. To do it right, there must be a comprehensive approach to evaluate what the proper role is for the GSEs, FHA, and private capital.

Private mortgage insurers are ready, willing, and able to take on a larger role in housing finance. The industry’s transparent, risk-adjusted capital requirements set it apart from other forms of credit enhancement, and that stability – coupled with 60 years of experience insuring high LTV-residential mortgages – puts it in a unique position to support the expansion of homeownership.

As our county’s leaders continue to explore housing finance reform, it only makes sense for them to consider how they can leverage the private MI industry’s inclusive and scalable business model.

Statement: Mortgage Bankers Association Report on Reform Recommendations for the GSEs and the Housing Finance System

Posted on by dcadmin

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USMI Statement on Mortgage Bankers Association Report on Reform Recommendations for the GSEs and the Housing Finance System

WASHINGTON — Lindsey Johnson, President and Executive Director of the U.S. Mortgage Insurers (USMI), today issued the following statement on the Mortgage Bankers Association report on reform recommendations for Fannie Mae and Freddie Mac (the GSEs) and the housing finance system:

“Today the Mortgage Bankers Association (MBA) released a thoughtful report that outlines its recommendations to reform Fannie Mae and Freddie Mac (the GSEs) and the housing finance system. The report covers many areas and USMI is particularly pleased that MBA recognizes the value of loan-level credit enhancement and the benefit of private mortgage insurance (MI). Importantly the report promotes greater use of front-end credit risk sharing, including through private mortgage insurance. The report also recognizes the important functions of private market participants such as lenders, private mortgage insurers and others, and reinforces that there should be a bright line between the functions of these private market participants in the primary market, and those of secondary market participants.  Housing finance is the last, and possibly the greatest, unfinished reform needed from the financial crisis. USMI is pleased to see MBA and other industry, trade and consumer groups provide ideas and proposals for how to reform the housing finance system and we look forward to continuing to work with MBA and others to promote reforms to the housing finance system to put more private capital in front of taxpayer risk and to create a more sustainable housing finance system that works for market participants, taxpayers and consumers.

“For 60 years, MI has provided effective credit risk protection for our nation’s mortgage finance system. This time-tested form of private capital should be the preferred method of absorbing credit loss in front of any government guaranty, helping to minimize taxpayer risk while ensuring mortgage credit remains accessible.”

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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.

Blog: 2017: An Opportunity to Coordinate America’s Housing Policy

Posted on by Lindsey Johnson

By Lindsey Johnson

While the housing finance system in the United States has developed into an ad hoc set of entities and programs, so has the regulatory system around it with more than seven[i] federal agencies playing a role in the formation of policy and regulation of activities for housing finance. Despite the expansive reach of the federal government in the housing finance system and the exhaustive list of government agencies regulating it, safety and soundness gaps exist, access to credit remains tight, and potential homeowners continue to fall through the cracks. Housing policy has become political in addition to being complex and has therefore created an environment where meaningful reforms are rarely achieved. However, the outcome of the historic 2016 election means that one party will control all three branches of government starting in 2017, which presents a unique opportunity to examine the underpinnings of the housing finance system and establish a more comprehensive and coordinated approach to housing policy, rather than just tinkering around the edges of the mortgage finance industry.

Here are three overarching housing considerations and recommendations for the new Congress and Administration:

  1. There is a need for more coordinated, comprehensive, and transparent federal housing policy.
  2. All attempts to reform the housing finance system should fix the parts of the system that were and are broken, while enhancing the parts of the system that work. Part of the solution to fix what is broken is to identify and address areas of inconsistency and redundancy.
  3. Private capital should play a much greater role in the housing finance system. There should be a regulatory body that sets safety and reliability rules for market players on an equitable basis. Further private capital, not government and taxpayers support, should be encouraged to provide access to credit and protect against credit risk where possible in the housing finance system.

Since major housing policy tends to be reactionary and seldom comprehensive, inconsistencies and overlaps have developed resulting in dramatic shifts between the completely private market (PLS market), the semi-government backed market (conventional market via Fannie Mae and Freddie Mac), and the fully government-backed Ginnie Mae market (FHA, VA, and USDA). One such area of inconsistency is in low downpayment lending, which is increasing as a proportion of the overall residential mortgage market. Currently, a single borrower is subject to different requirements and pays different premium rates for insurance or a guarantee on a low downpayment loan under private mortgage insurance (MI), the FHA, the USDA’s Rural Housing Service, the Department of Veterans Affairs, or state Housing Finance Agency programs—even though the borrower’s risk profile remains the same.

A coordinated policy would inform how low downpayment lending in the U.S. is carried out. For example, it is common in other types of insurance such as crop, flood and terrorism insurance, to limit government programs to higher risk borrowers or to condition access to supplemental capacity by requiring some demonstration of the need for that capacity. The FHA’s current loan limits do not provide a level playing field nor is there a direct preference for a private capital alternative.  Instead, any preference is done indirectly through premium rate setting and competition, which results in an unstable policy environment. The resulting outcome is dramatic fluctuations between these mortgage finance markets, which at times is most evident between the private mortgage insurance market and the 100% government-backed mortgage insurance market at FHA. While it may seem normal to have some fluctuations during different housing cycles, the recent market fluctuations have most often been the result of competition for market share between the two. This is neither conducive for the most efficient and effective mortgage finance market nor does it ensure that borrowers are being best served. Furthermore, there are redundancies and significant overlap between several government agencies such as FHA and the Rural Housing Service (RHS), where on repeated occasions the GAO[ii] and others have suggested consolidating the agencies or at least specific areas of intersection between them.

Of course a true comprehensive, coordinated housing policy will require reform of the GSEs—or as previously stated, fixing the parts of the housing finance system that were and are broken while enhancing the parts of the system that work. Although housing finance reform may not be the first focus of the new Congress and Administration, significant steps could be taken in the near-term to encourage greater reliance of private capital and market discipline in the housing finance system by establishing clarity about the roles of the different agencies in facilitating homeownership and by providing much greater transparency at both FHA and the GSEs about how these agencies price credit risk. Again, this difference between agencies is particularly sharp in the case of FHA and the conventional lending space with Fannie Mae and Freddie Mac, which use private capital, such as private MI, to insure against a portion of first-loss on high LTV loans. However, in this case, a single borrower either pays a premium rate determined on an average basis (FHA) or a risk-based one (private MI), with the risk-based premium driven by “asset requirements” established by the government-guaranteed GSEs but not by the government-guaranteed FHA. So while there continues to be bipartisan support for reducing the government’s footprint and reducing taxpayers’ exposure to mortgage credit risk, the current market’s inconsistencies are considerable roadblocks to achieving that goal.

There are a number of different proposals for reforming the housing finance system, but most essential going forward is that Congress fixes one of the greatest flaws of the previous and current system, namely that government-backed entities – whether completely government controlled such as FHA or quasi-government such as the GSEs – should not set rules for and then compete on an unlevel playing field with the private market. These entities should perform explicit functions that foster greater participation by the private market, should promote a race-to-the top and not a race-to-the-bottom, and should be highly regulated. They should also be completely transparent in the credit risk they guarantee and how they price that credit risk. Transparency about how government prices credit risk would facilitate the greatest level of liquidity in these markets, and for credit risk transfer would foster an understanding of how these transactions are priced and the best execution for each. Finally, providing greater transparency will help end a structure where only a few agencies control the housing finance system because of their ownership of proprietary data, systems, and pricing. In conservatorship, the GSEs have an explicit guarantee on their Mortgage Backed Securities from the federal government. Therefore, until comprehensive housing finance reform is realized, critical steps could be taken now to improve transparency and foster greater understanding by market participants that will ultimately better inform borrowers. More transparent pricing will benefit lenders, investors, and most of all consumers and taxpayers.

As stated by former FHFA Director Ed DeMarco, housing finance reform “remains the great unfinished business from the Great Recession.” The complexity and political nature of the issues surrounding housing finance reform make it a daunting task to be sure, but the new Administration and Congress have a unique opportunity to make the housing finance system more coordinated, transparent, and disciplined to work for taxpayers and borrowers.

[i] Federal agencies involved with housing finance policy and regulation include FHFA, HUD, VA, USDA, Treasury, NCUA, and CFPB

[ii] U.S. Government Accountability Office, HOME MORTGAGE GUARANTEES: Issues to Consider in Evaluating Opportunities to Consolidate Two Overlapping Single-Family Programs (September 29, 2016).  See http://www.gao.gov/assets/690/680151.pdf.

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.

Press Release: Comments on FHFA’s Single-Family Credit Risk Transfer Request for Input

Posted on by dcadmin

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For Immediate Release

October 11, 2016

Media Contact: Dan Knight

(202) 777-3547

dknight@clsstrategies.com

USMI Submits Comments on FHFA’s Single-Family Credit Risk Transfer Request for Input
Mortgage insurers outline industry’s role in shifting greater risk away from taxpayers in an equitable way for all lenders while expanding access to homeownership

WASHINGTON — U.S. Mortgage Insurers (USMI) submitted comments to the Federal Housing Finance Agency (FHFA) today regarding its Single-Family Credit Risk Transfer (CRT) Request for Input (RFI) and steps to further shield the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, as well as American taxpayers, from losses from mortgage-related risks. In its comments, USMI highlights the distinct advantages of front-end CRT done through expanded use of mortgage insurance (MI) that can address existing shortcomings in the GSEs’ credit risk transfer transactions and that can offer substantial benefits for taxpayers, lenders of all sizes, and borrowers.

USMI  notes in its comments that “increasing the proportion of front-end CRT in the Enterprises’ CRT strategy will advance four key objectives of a well-functioning housing finance system by ensuring that:  (1) a substantial of private capital loss protection is available in bad times as well as good; (2) such private capital absorbs and deepens protection against first losses before the government and taxpayer; (3) all sizes and types of financial institutions have equitable access to CRT; and (4) CRT costs are transparent, thereby enhancing borrower access to affordable mortgage credit.”

“By design, and as evidenced by the more than $50 billion in claims our industry paid during and since the financial crisis, mortgage insurance provides significant first-loss risk protection for the government and taxpayers against losses on low-down payment loans,” said Lindsey Johnson, President and Executive Director of USMI. “As the government explores ways to further reduce mortgage-related risk while also ensuring that Americans continue to have access to affordable home financing, experience shows that mortgage insurance is the answer, particularly when you consider mortgage insurance protection is at work before the risk even reaches the GSEs’ balance sheets.”

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While USMI commends FHFA in its comment letter for establishing principles and risks to evaluate front-end CRT structures, which will enable the GSEs and other market participants to analyze the virtues and shortcomings of each form of CRT using an analytical framework, it urges that “the RFI principles should apply to both existing and proposed CRT activities.”

Among other questions, the RFI inquired about benefits of front-end CRT for small lenders. USMI explains in its letter that “small lenders derive optimal benefits from CRT programs that are familiar, have minimal implementation costs, and are based on lender selection among several market participants. Accordingly, MI works very well for small lenders (and deeper-cover MI similarly would work very well for small lenders) because it is already part of their current credit origination processes, is available with transparent pricing, and is available to lenders of all sizes. On the other hand, small lenders have no access to and derive no direct benefits from back-end forms of CRT.”

“In addition to the specific goal of shifting more risk from Fannie Mae and Freddie Mac, and unlike back-end CRT, mortgage insurance plays a direct role in helping families who have good credit but can’t afford large down payments to qualify for a mortgage. For nearly sixty years, mortgage insurers have been leaders in helping millions of Americans, particularly first-time homebuyers, purchase homes in an affordable way,” Johnson said.

Johnson added, “MI is one of the best forms of time-tested credit risk protection for our nation’s mortgage finance system. Mortgage insurers have taken steps to enhance both their claims paying ability—by increased capital and operational standards—and their claims paying process through updated Master Policy Agreements. MI is private capital directly tied to housing. Unlike some other forms of CRT structures, MI is dedicated to a housing finance system in good and bad economic times. By using more MI to provide deeper front-end risk sharing on loans the GSEs guaranty, the GSEs and taxpayers will be at a much more remote risk of losses. Promoting greater front-end risk sharing with MI is a way to help build a strong, stable housing finance system, provide prudent access to affordable mortgage credit, protect taxpayers, and help facilitate the homeownership aspirations for Americans for years to come. ”

USMI’s full comments to FHFA can be found here. A fact sheet on USMI’s comments can be found here.

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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.

Statement: New GSE Credit Insurance Pilot Program

Posted on by dcadmin

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For Immediate Release

September 27, 2016

Media Contact: Dan Knight

(202) 777-3547

dknight@clsstrategies.com

 

USMI Statement on New GSE Credit Insurance Pilot Program

WASHINGTON — Lindsey Johnson, President and Executive Director of U.S. Mortgage Insurers (USMI), said the following today upon the announcement from Freddie Mac about a new pilot program involving mortgage insurers:

“For the past four years, Freddie Mac and Fannie Mae have been experimenting with a number of structures to shift risk away from the GSEs to the private markets. The program announced yesterday for an offering with affiliates of private mortgage insurers is the latest addition to this effort. While it is good to see the GSEs continue to explore ways to reduce the government’s mortgage credit risk exposure, this new offering is effectively a form of credit insurance that Freddie Mac stated builds on its Agency Credit Insurance Structure (ACIS), which is a back-end credit insurance program. While some mortgage insurers are exploring and may ultimately participate in this new credit insurance program, we believe it is important to note that this new structure should not be confused with the deep cover, true mortgage insurance front-end credit risk transfer proposal that we and others have been advocating for.

As the FHFA seeks comment through the RFI process on additional ways to do greater front-end risk sharing, USMI continues to believe that MI is one of the best, time-tested forms of credit risk protection for our nation’s mortgage finance system. We also believe that using more traditional deep cover MI would be a key component to a sound housing policy in the future. Specifically, our industry proposes expanding the current risk protection provided by MI, which today guards up to 35 percent of a loan’s value, as a means of front-end credit risk transfer. This will significantly protect taxpayers while also ensuring borrower access to low down payment mortgages. Having the GSEs increase that protection coverage would put more private capital at risk—precisely what taxpayers and the economy need. Such an entity-based program would make greater use of private capital, put the GSEs and taxpayers in a more remote loss position, allow lenders of all sizes and types to participate, and, importantly, help ensure access to affordable homeownership. As it has been for the past sixty years, private MI can be provided consistently through all economic cycles. We look forward to continuing that dialogue with FHFA, Fannie Mae and Freddie Mac, policymakers, and other stakeholders.”

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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.

Statement: FHFA Credit Risk Transfer Progress Report and RFI

Posted on by dcadmin


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For Immediate Release

June 30, 2016

Media Contacts

Laura Capicotto (202) 777-3536 (lcapicotto@clsstrategies.com)

 

USMI Statement on FHFA Credit Risk Transfer Progress Report and RFI

The Federal Housing Finance Agency (FHFA) has released a Progress Report and Request for Input (RFI) on Single-Family Credit Risk Transfers as a follow-up to the release of the 2016 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions.  U.S. Mortgage Insurers (USMI) welcomes the opportunity to work with FHFA and the government sponsored enterprises (GSEs) on specific steps the GSEs need to take to increase the amount and levels of credit risk transferred.  Front-end risk sharing with deeper coverage using private mortgage insurance (MI) will address existing shortcomings in the GSEs’ credit risk transfer efforts and offers substantial benefits for taxpayers and borrowers.

“The MI industry has taken substantial steps to be well positioned to provide more private capital in front of the GSEs’ risk exposure with increased and enhanced capital and reliability standards.  MIs are well positioned to do more right now to protect taxpayers and help borrowers,” said Lindsey Johnson, President and Executive Director of USMI.  “In the absence of comprehensive reform, we should explore many options in the credit risk share market, with greater balance among them.  With three years of largely back-end risk sharing transactions, the potential benefits of front-end risk sharing have not been realized.  Unfortunately, the RFI inadequately portrays the role private mortgage insurers (MIs) play in assuming credit risk and the steps MIs have taken to strengthen capital and counterparty standards (click here for MI reliability fact sheet).  The RFI discusses many risks but neither provides quantitative analysis of the size and relative importance of those risks, nor proposes or requests proposals for ways to quantify those risks.  A strong case exists for expanding mortgage insurance coverage down to 50 percent of the value of the loan and doing it on the front-end, before the risk ever reaches the GSEs’ balance sheets, as part of the next phase of experimentation.”

USMI looks forward to commenting on the following issues as part of the RFI process:

  • The need for a balance of methods to offload the mortgage risk concentrated at the GSEs and to enhance housing finance reform possibilities;
  • The need for equivalency of standards to be consistently applied to all sources of housing finance and credit enhancement to ensure there is no regulatory arbitrage;
  • The need to address pricing and modeling transparency;
  • The need to ensure that a broad set of lenders have equitable access to the system; and
  • The need to have risk sharing partners that will stay in the market in good times and bad, including during another market downturn when the housing finance system is under stress.

Front-end risk sharing via deeper cover MI transfers credit risk to MIs at the time the loan is originated, which reduces risk before it ever gets to the GSEs and provides real time price transparency so that any savings can be passed on to borrowers.

“While we understand the Enterprises’ consideration of exposure to all counterparties, we think increased private capital by strong counterparties further reduces taxpayer risk and should be encouraged.  The MI industry is ready and prepared to do more,” said Johnson.  “MIs have raised $9 billion in new capital since the financial crisis, and are well positioned to raise additional capital to meet demand.”

MIs covered roughly $50 billion in claims to the GSEs since conservatorship.  Throughout the financial crisis, USMI members never stopped paying claims, never received any bailout money from the Federal government, and continued to write new insurance.  In fact, since the crisis, MIs have paid all valid claims, with 96 percent paid in cash and the remainder due over time.  MIs have materially increased their claims paying ability in both good and bad economic times due to new higher capital standards under the Private Mortgage Insurance Eligibility Requirements (PMIERs).  All MIs have met or exceeded PMIERs requirements as of December 31, 2015.

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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.