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.”
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.
Here is a roundup of news surrounding recent developments in President-elect Donald Trump’s housing policy, key legislative proposals and also reports on the benefits of front-end credit risk sharing with deep cover mortgage insurance, and a new USMI blog post on unnecessary upfront risk fees (loan-level price adjustments) imposed by Fannie Mae and Freddie Mac:
- Nominee for Secretary of Housing and Urban Development Announced. Earlier this week, President-elect Donald Trump announced that he would nominate Dr. Ben Carson as his Secretary of Housing and Urban Development.
- GSE Credit Risk Transfer Legislation Introduced in Congress. HousingWire and American Banker report that on December 8 Reps. Ed Royce (R-Calif.) and Gwen Moore (D-Wisc.) introduced a new bill in the House of Representatives that would require the GSEs to offload more credit risk onto the private sector. The Taxpayer Protections and Market Access for Mortgage Finance Act of 2016 (H.R. 6487) seeks to require Fannie Mae and Freddie Mac (GSEs) to transfer more credit risk through front-end credit risk transfer (CRT) transactions to mitigate losses and risks to taxpayers and the federal government. In addition to other provisions, H.R. 6487 calls for a five-year pilot program to increase the amount of risk transferred away from the government before it reaches the GSEs’ balance sheets by using front-end CRT with private mortgage insurance (MI). This front-end MI-based CRT method is consistent with recommendations to the Federal Housing Finance Agency (FHFA) from USMI and others, and builds upon the current, effective use of private mortgage insurance in the GSE system that has been in practice for decades.
- Treasury Secretary Nominee Calls for GSEs to Exit Conservatorship. In recent comments, President-elect Donald Trump’s nominee for Treasury Secretary, Steve Mnuchin, called for the GSEs to exit conservatorship, adding that government ownership of the companies displaces private capital in the housing finance system and that the Trump administration “will get it done reasonably fast.” President-elect Trump’s transition team noted that the need to structurally reform the GSEs has bipartisan agreement.
- Housing Expert Extols Benefits of Front-End Credit Risk Transfer and Deeper Cover Mortgage Insurance. In a recent article, Faith Schwartz, a housing finance policy expert who has worked extensively with the federal government in the US housing market, wrote on the benefits of front-end credit risk transfer (CRT), including through the use of deeper cover mortgage insurance (MI). Schwartz notes that front-end CRT and deeper cover MI allow for greater transparency, more options in a counter-cyclical volatile market, inclusive institutional partners and borrower process, and allows the GSEs to reach their goals in de-risking their credit guarantee. Schwartz concludes her article by saying: “In summary, whether it is recourse to a lending institution or participation in the front-end MI cost structure, pricing this risk at origination will continue to bring forward price discovery and transparency. This means the consumer and lender will be closer to the true credit costs of origination. With experience pricing and executing on CRT, it may become clearer where the differential cost of credit lies. The additional impact of driving more front-end CRT will be scalability and less process on the back-end for the GSE’s. By leveraging the front-end model, GSE’s will reach more borrowers and utilize a wider array of lending partners through this process.”
- Consumer and Civil Rights Groups Raise Concerns about LLPAs. The MReport writes that 21 groups sent a letter to FHFA Director Mel Watt and Treasury Secretary Jack Lew on December 8 “expressing concern that too many creditworthy low- and moderate-income borrowers are being denied access to mortgage credit.” These groups state that “The increase in the Enterprises’ guarantee fees and risk-based pricing (LLPAs) has had a number of effects to varying degrees that some predicted, including more banks are holding fixed-rate loans on portfolio, more financing of lower-credit score borrowers by the Federal Housing Administration, and fewer originations to the underserved overall.”
- ICYMI: Lindsey Johnson writes on Loan-Level Price Adjustments (LLPAs). In a new blog post, USMI President Lindsey Johnson highlights the need for the reduction or elimination of upfront risk fees (LLPAs) based on a borrower’s credit score and down payment. In the blog, Johnson explains how this risk is already protected by private mortgage insurance, paid for by the homeowner. LLPAs, which were put in place in 2008, are increasingly unnecessary following the enactment of stronger underwriting standards for privately insured mortgages and in essence double charge a borrower for the same risk. Johnson encourages the FHFA and the GSEs to continue to work to manage risk, however LLPAs have become arbitrary fees that make homeownership more expensive or puts homeownership out of reach for many middle and lower income homebuyers. USMI was part of a group of 25 organizations that wrote a letter to FHFA Director Mel Watt in June calling for FHFA and the GSEs to reduce to eliminate LLPAs.