Taxpayer Protection

The private MI industry and FHA should serve complementary roles to promote affordable and sustainable homeownership. To do that, FHA needs to become more financially resilient, in line with the rest of the financial system, and remain focused on its core mission of serving borrowers who do not otherwise have access in the conventional market.

USMI strongly believes that borrowers benefit when they have access to the conventional market and encourages greater coordination between financial regulatory agencies to ensure a more consistent federal housing policy. Such a housing policy can help ensure borrowers are not arbitrarily directed to government-backed loans, which has fewer lenders in the market, reducing borrowers’ competitive options for mortgage finance credit. According to data from the Housing Mortgage Disclosure Act, FHA had one-third the number of lenders for purchase loans compared to the conventional market in 2020.

Private mortgage insurers put their own capital at risk to mitigate credit risk and are positioned to assume that risk whenever possible, consistent with the principles guiding GSE reform. Taxpayers continue to face exposure to $1.2 trillion in FHA-insured single family mortgage credit risk, without adequate capital held against that risk.

USMI calls for reforms to FHA capital standards, including increasing the Mutual Mortgage Insurance Fund’s (MMIF) minimum capital ratio to reduce the chances of another taxpayer bailout in future economic downturns, and stress testing those levels to ensure MMIF’s financial position is more consistent with the risks assumed.
FHA should be dissuaded from taking on risks in market sectors where private MI is readily available.

Pending meaningful congressional action on housing finance reform, significant incremental progress toward reducing taxpayer risk can be accomplished through greater use of MI. On GSE loans with down payments below 20 percent, MI coverage currently protects up to 35 percent of the loan value. Increasing private MI coverage would decrease taxpayer risk by transferring more risk to sophisticated and experienced sources of private capital.

The increased use of private MI would further reduce the risk concentrated at the GSEs and utilize market participants that are well capitalized and wholly dedicated to the U.S. housing finance system.

Private mortgage insurers are the primary means by which the GSEs, who specialize in mortgage credit risk, protect against the risk of higher loan-to-value (LTV) loans. As regulators and the industry seek to expand the private label market and the portfolio market, it is important to have a second pair of eyes within the underwriting process, and would be prudent for banks to receive additional capital relief for using private MI to underwrite and insure loans.

MI plays a significant role in reducing taxpayer risk on loans purchased or securitized by the GSEs. While the GSEs’ congressional charters set minimum requirements for risk coverage, for nearly 30 years the market practice has been to use greater protection than the minimum “charter-level” that is required. This additional level of MI, also known as “standard coverage,” has served the housing finance system well and represents a vital source of private capital supporting GSE loans, providing substantial taxpayer protection at an affordable cost to borrowers.

The benefits of standard MI coverage should be preserved when considering policy alternatives to ensure taxpayers are at a more remote risk of loss in any reformed system. In the past, standard coverage was appropriately made part of bipartisan housing reform legislation. Deeper and broader use of MI could further limit taxpayer exposure.