As the end of 2020 approaches, U.S. Mortgage Insurers (USMI) want to recognize and thank everyone who has worked to support homeowners and the U.S. housing finance system during a year full of unprecedented challenges. This past year has also ushered in significant federal regulatory and policy proposals and changes, and below are some of the key developments that we are following late this year. In 2021, USMI looks forward to working with policy makers and others to support a housing finance system that creates homeownership opportunities backed by private capital for more Americans.

FHFA Issues Final Capital Rule
Treasury Secretary Mnuchin Testifies Before Congress
House Financial Services Chairwoman Sends Letter to President-Elect Biden
Changes in FHFA Leadership
FHA Issues New Loan Limits and Commissioner Dana Wade Reacts
What We Are Reading

• FHFA Issues Final Capital Rule. On November 18, the Federal Housing Finance Agency (FHFA) released its final rule on the Enterprise Regulatory Capital Framework (ERCF) outlining post-conservatorship capital requirements for the government sponsored entities (GSEs), Fannie Mae and Freddie Mac. The GSEs will collectively be required to hold $284 billion in capital, representing approximately $20 billion more than was outlined in the 2020 proposed rule and more than $100 billion than the 2018 proposal. FHFA Director Mark Calabria said the ERCF “puts Fannie Mae and Freddie Mac on a path toward a sound capital footing” and it is “another milestone necessary for responsibly ending the conservatorships.”  While appropriate capital standards for the GSEs is a critical reform, USMI continues to urge FHFA to implement additional reforms necessary to put the housing finance system on a more stable footing. It is essential for these reforms to occur before the GSEs are released from conservatorship in order to strengthen the housing finance system and ensure that the GSEs’ operations comply with their congressional charters.
  
  Many organizations commented that the capital rule is an essential component of reforming the nation’s housing finance system, though several housing groups and policymakers also expressed concern about the impact of the final rule on consumers’ cost and access to mortgage finance credit. The Center for Responsible Lending said the final rule “places the burden of future catastrophic risk on the backs of these hardworking families and will unnecessarily raise the cost of mortgages for all borrowers, resulting in limited credit availability.” It added, “the rule pushes homeownership farther away from families of color long denied mortgage credit access.” Similarly, the National Association of REALTORS® also raised concerns about the impact of the rule on the cost of mortgage finance credit. Sen. Sherrod Brown (D-OH), ranking member of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, wrote in a statement that “the GSEs help millions fulfill the dream of homeownership – especially those living in underserved rural and urban areas. Director Calabria’s rush to finish this rule without addressing concerns raised about its effects is a recipe for disaster and is patently unfair to America’s homeowners and renters.”
  
  The final rule goes into effect 60 days after it is published in the Federal Register.

• Treasury Secretary Mnuchin Testifies Before Congress—Fields Questions on Possible GSE Exit from Conservatorship. On December 1 and 2, Treasury Secretary Steven Mnuchin testified before the Senate Banking Committee and the House Financial Services Committee (HFSC), respectively. While both hearings focused on the Treasury Department’s response to the COVID-19 crisis and its implementation of the CARES Act programs and relief, Secretary Mnuchin also addressed the GSEs’ possible exit from conservatorship.
  
  Senators on both sides of the aisle expressed concern regarding an exit from conservatorship for the GSEs. Senator Mike Round (R-SD) noted that in “a perfect world that conservatorship should have been ended some time ago,” but voiced his concern that releasing the GSEs too early would call into question the strength of the housing sector and asked Secretary Mnuchin about an appropriate timeline. Secretary Mnuchin reiterated the importance of the GSEs having “appropriate capital” levels before being released and emphasized that the Treasury Department has made “no decisions” on this matter. The Secretary also fielded similar questions and concerns from lawmakers when he appeared before the HFSC the next day. Among those that raised objections to the GSEs’ exit from conservatorship was HFSC Chairwoman Maxine Waters (D-CA), who expressed concerns that the Treasury Department is working with the FHFA to “rush” the GSEs out of conservatorship.
  
  In a December 10 blog post, the American Action Forum (AAF) opined on the parameters of consent orders for the GSEs and the need for additional actions to ringfence Fannie and Freddie.  AAF President Doug Holtz-Eakin wrote, “The GSEs are notorious for sidestepping caps on compensation, lobbying bans, accounting standards, and more. Capital accumulation is the easy part. A really tight leash would require a consent decree specifying in great detail the management and operation of the GSEs, and with sufficient foresight to anticipate the condition that will prevail in future housing and financial markets.”
  
  In a blog post released in recent weeks, USMI outlined key reforms that should occur, especially ahead of the possible release of the GSEs from conservatorship.

• House Financial Services Chairwoman Waters Sends Letter to President-Elect Biden. Last week, Chairwoman Waters sent a letter to President-elect Joe Biden and his transition team detailing recommendations to immediately reverse several of the actions by the Trump Administration that fall within the HFSC’s jurisdiction, including changes to the Consumer Financial Protection Bureau’s (CFPB) rulemaking and enforcement activities, as well as enhancements for oversight of Wall Street. Chairwoman Waters also called on President-elect Biden to issue an order preventing evictions and to promote stable housing during the pandemic. Key housing regulations in the letter include FHFA’s Enterprise Regulatory Capital Framework, which Chairwoman Waters said should be rescinded and also the CFPB’s General Qualified Mortgage rulemaking, which the Chairwoman recommended be paused until “various options can be thoroughly analyzed examining the potential impact for access to credit and consumer protections.”
  
  More broadly, Chairwoman Waters called on President-elect Biden to support affordable housing by addressing homelessness, promoting housing affordability, and fair housing regulations. The Chairwoman detailed a full list of policy recommendations for the Biden Administration, which can be found here.

• Changes in FHFA Leadership. FHFA announced that Principal Deputy Director Adolfo Marzol plans to retire on December 18, 2020. Director Calabria praised Marzol for his work at FHFA, specifically his leadership to “spearhead the Enterprise capital rule” and his “central role in the response to COVID-19.” Chris Bosland, FHFA’s Senior Advisor for Regulation, will succeed Marzol as the Principal Deputy Director.

• FHA Issues New Loan Limits and Commissioner Dana Wade Reacts. On December 2, the Federal Housing Administration (FHA) released its 2021 Nationwide Forward Mortgage Limits. The new national conforming limit is $548,250 for a one-unit property. The FHA’s low-cost area limit for a single unit property will increase to $356,362, or 65% of the new confirming mortgage limit. However, in high-cost areas, the new loan limit is $822,375, or 150% of the 2021 conforming loan limit. This is the fifth year in a row that the FHA has increased the floor limits. FHA Commissioner Dana Wade expressed concern about the increase stating, “FHA has seen consistent increases in loan limits during the past few years, putting it in a position to serve a segment of borrowers that may be better-served by the conventional market.” Wade continued, “FHA’s mission is to support low-to-moderate income borrowers, so why does the law permit FHA to insure mortgages up to $822,375? This is a question for Congress and the taxpayers who stand behind FHA to answer.”

• What We Are Reading: Forbes published an article titled, “4 Ways To Get A Low-Down-Payment Mortgage Without An FHA Loan.” The article noted one of the main benefits of private mortgage insurance (PMI) over government-backed loans: “You can cancel [PMI] once you have 20% equity. With an FHA loan, you would have to pay monthly mortgage insurance premiums for at least 11 years, if not for the life of the loan.”
  
  

October has been a busy month in housing finance. Last week, USMI issued a new report on the strength and resiliency of the private mortgage insurance (MI) industry. The report highlights regulatory and industry-led reforms since the 2008 financial crisis which have enabled it to better serve homebuyers and lenders. It also continued to urge the Federal Housing Finance Agency (FHFA) to develop policies for the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, to promote a more stable and equitable housing finance system post-conservatorship.  While all eyes are on the election this week, below are other important issues USMI is tracking:

New USMI Report Released on MI Industry
USMI Blog on FHFA Re-Proposed Enterprise Regulatory Capital Framework (ERCF) and Strategic Plan
USMI’s Comments on FHFA Strategic Plan
FHFA Proposed Rule for New Enterprise Products and Activities
Urban Institute Releases October 2020 Chartbook
USMI President on “Main St. Finance” Podcast
ICYMI: CFPB Extends QM Patch

• New USMI Report Released on MI Industry. Last week, USMI released a new report titled, “Private Mortgage Insurance: Stronger and More Resilient.” The report highlights significant regulatory and industry-led reforms taken since the 2008 financial crisis to improve and strengthen the role of private MI in the nation’s housing finance system. It analyzes the various steps the industry and regulators have undertaken and continue to take to ensure sustainable mortgage credit through all market cycles and to better serve low down payment borrowers in the conventional market, especially during critical economic times like these.
  
  Upon the report’s release, USMI President Lindsey Johnson said, “Though private mortgage insurers have been a crucial part of the housing finance system for more than 60 years, this is definitely ‘not your father’s’ MI industry.  Enhanced capital and operational standards, as well as increased active management of mortgage credit risk, including through the distribution of credit risk to the global reinsurance and capital markets, has put the industry in a stronger position.” She added, “These enhancements will enable the industry to be a more stabilizing force through different housing cycles — including the current COVID-19 crisis — which greatly benefits the GSEs and taxpayers and enhances the conventional mortgage finance system.”
  
  The report details several of the major enhancements to the industry in the last decade, including: Private Mortgage Insurer Eligibility Requirements (PMIERs); New Master Policy; Rescission Relief Principles; and MI Credit Risk Transfer (MI-CRT) Structures. The report provides an update on the growing MI-CRT market, noting that as of October 2020, private MI companies have transferred nearly $41.4 billion in risk on approximately $1.8 trillion of insurance-in-force (IIF) since 2015 using 23 reinsurance deals and 30 insurance-linked note (ILN) transactions.

• USMI Blog on FHFA Re-Proposed ERCF and Strategic Plan. This week, USMI published a blog titled, “Capital Alone is Not Comprehensive Housing Finance Reform: More Administrative Actions are Required & FHFA’s Re-Proposed Capital Framework Should be Modified.” The piece emphasizes the importance of the appropriate level of capital for Fannie Mae and Freddie Mac, but also the need for additional reforms prior to the GSEs’ exit from conservatorship. FHFA’s re-proposed ERCF will guide FHFA as it works to release the GSEs from conservatorship. As proposed, the ERCF would require the GSEs to hold about 10 times their current capital levels ($243 billion versus $28 billion, respectively, as of Q2 2020) and roughly five times their projected losses under a severe economic downturn.  USMI submitted its comment letter on the re-proposed ERCF in August 2020 and published an executive summary as well.
  
  USMI agrees that a robust and appropriately tailored capital standard for the GSEs is necessary and should strike the right balance to ensure consumers’ continued access to affordable mortgage credit while also protecting taxpayers. However, the ERCF has several overly conservative elements, such as the treatment of private MI and CRT transactions, as well as numerous non-risk adjusted capital buffers. Instead, USMI suggests FHFA should reduce or eliminate non-risk based elements and build the capital rule around an insurance framework, given the GSEs’ core function is a guaranty business. The framework should ultimately ensure adequate capital for the risks taken by the GSEs, but should not be set to an arbitrarily high level that puts homeownership out of reach for many American families.

• USMI’s Comments on FHFA’s Strategic Plan. USMI’s blog also discusses USMI’s recommendations for FHFA’s Strategic Plan for Fiscal Years 2021-2024. USMI welcomes FHFA’s work on a post-conservatorship capital framework, but notes that it is important to recognize that capital alone is not comprehensive GSE reform, and additional actions are necessary to reform the housing finance system and put it on more stable footing for the long-term.Earlier this month, USMI submitted a comment letter to FHFA on its Strategic Plan. In its comment, USMI recommended that FHFA take further steps to reduce the GSEs’ risk exposure, level the playing field, and increase transparency around the GSEs’ pricing and business operations. USMI called for FHFA to take five specific actions in advance of the GSEs’ exit from conservatorship:
  
  1. Limit the GSEs’ activities to those necessary to fulfill their intended role of facilitating a liquid secondary market for mortgages, preserving the “bright line” separation between the primary and secondary mortgage markets;
  2. Increase transparency around the GSEs’ operations, credit decisioning, technologies, and role in the housing finance system;
  3. Require a “notice and comment period” process and prior approval for new products and activities at the GSEs;
  4. Require that counterparty standards be set by or in coordination with FHFA, and not just the GSEs; and
  5. Promote a clear, consistent, and coordinated housing finance system.

• FHFA Proposed Rule for New Enterprise Products and Activities. Last week, FHFA released a proposed rule concerning “Prior Approval for Enterprise Products” that would require the GSEs to provide notice to FHFA before undertaking a new activity and obtain prior approval from FHFA before offering a new product. USMI welcomes Director Calabria’s effort to establish a more transparent and objective process for the development and implementation of new GSE products and activities. USMI further believes that the GSEs should only introduce new products, activities, and pilots when there is clear and compelling evidence that the GSEs are needed to fill a market void that the private market cannot meet. This rule would allow a rigorous review of the GSEs’ efforts and ensure that the GSEs’ activities are not duplicative nor unfairly competitive with the primary and private market participants.
  
  In response to the release of the proposed rule, the National Taxpayers Union (NTU) published a blog  titled, “Latest GSE Rule Protects Taxpayers and Businesses from Government Overreach.” NTU praised the rule as it would “help to ensure that the GSEs are neither crowding out private market competitors nor expanding obligations back-stopped by taxpayers.” NTU said the proposed rule is a “constructive step that protects taxpayers and private businesses from government overreach.”

• Urban Institute Releases October 2020 Chartbook. This week, the Urban Institute published its October chartbook on housing finance. Included in this comprehensive analysis of industry data are updates on the MI industry, beginning on page 32. The Chartbook highlights that “Mortgage insurance activity via the FHA, VA and private insurers increased from $197 billion in Q2 2019 to $327 billion in Q2 2020, a 57.4 percent increase.  In the second quarter of 2020, private mortgage insurance written increased by $51.3 billion, FHA increased by $17.2 billion and VA increased by $56.4 billion relative to Q2 2019.”

• USMI President on “Main St. Finance” Podcast. USMI’s members work to help low down payment borrowers have access to affordable mortgage credit. To share that message, USMI President Lindsey Johnson joined the “Main St. Finance” podcast to discuss the 20 percent down payment myth and the different low down payment options available to borrowers. Specifically, she explained how private MI bridges the down payment gap to help home-ready buyers get in their home sooner while also protecting lenders, the GSEs, and taxpayers from mortgage credit-related losses. Listen to podcast here.

• ICYMI: CFPB Extends GSE Patch. On October 22, the Consumer Financial Protection Bureau (CFPB) issued a final rule to extend the GSE Patch until the CFPB implements a new General Qualified Mortgage (QM) definition. USMI previously submitted a comment letter on the Bureau’s proposed updates to the General QM definition, as well as a comment letter which recommended the CFPB set the sunset date for the GSE Patch to be at least six months after the effective date of the General QM definition final rule.

As Congress returns from the August recess, regulators closed out the public comment periods for two proposed rules that will substantially impact the housing finance system and borrowers’ access to mortgage credit. Though there has been considerable focus on these important rulemakings over the past several months, policymakers, industry stakeholders, and USMI members remain hard at work supporting the housing finance system as we continue to adapt to and navigate the health and economic consequences of the COVID-19 pandemic. Below are the latest happenings from USMI and key topics we are tracking.

USMI Submits Comments to FHFA on Proposed Enterprise Regulatory Capital Framework (ERCF)
FHFA Director Calabria Testifies Before House Financial Services Committee
USMI Submits Comments to CFPB on General Qualified Mortgage (QM) Definition
Coalition Urges CFPB to Increase the QM Safe Harbor Threshold
ICYMI: USMI Column Published in The Dallas Morning News

USMI Submits Comments to FHFA on Proposed Enterprise Regulatory Capital Framework. On August 31, USMI submitted its comments to the Federal Housing Finance Agency (FHFA) on the re-proposed Enterprise Regulatory Capital Framework (ERCF). In its comments, USMI emphasized the importance of constructing a balanced, transparent, and analytically justified post-conservatorship capital framework for the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. USMI President Lindsey Johnson said that “while sufficient levels of capital are important to the sustainable operation of Fannie Mae and Freddie Mac, excessive capital requirements could have a detrimental effect on mortgage availability.” She also added that these excessive capital requirements could, in turn, push mortgage lending outside of the conventional mortgage market.

USMI also called for more transparent and objective treatment of the GSEs’ counterparties, especially private mortgage insurers that already meet a set of rigorous capital and operational requirements known as the Private Mortgage Insurer Eligibility Requirements (PMIERs). In its comment letter, USMI provided the FHFA with detailed analysis to demonstrate that the capital credit for private MI should be increased to be consistent with historical analysis.  Similarly, USMI suggested that the proposed rule should encourage, and not discourage, private capital to absorb more risk in front of the GSEs and taxpayers.  

A number of other organizations shared similar assessments and recommendations.  The Urban Institute said that “the capital requirements on purchase loans should be lower, and more credit should be given to mortgage insurance.” National Taxpayers Union recommended that “[t]he proposed rule should promote, and not disincentivize private capital—including transferring first-loss credit risk through the use of loan level credit enhancement, such as private mortgage [insurance] and through transferring other layers of credit risk through responsible CRT.”

Finally, USMI noted that the revised capital standard is only one element of comprehensive GSE reform, calling on the FHFA to ensure the GSEs are appropriately regulated, maintain their position as market makers, and preserve the bright line separation between the primary and secondary mortgage markets.

USMI’s full comments on the 2020 proposed rule can be found here, an executive summary can be found here, and its comments on the 2018 proposal can be found here.

FHFA Director Calabria Testifies Before House Financial Services. On September 16, FHFA Director Mark Calabria testified before the House Financial Services Committee and provided an overview of the FHFA’s response to the COVID-19 pandemic and the ERCF. A number of members on the Committee focused their comments and questions on the ERCF with Representative Steve Stivers (R-OH) noting in his comments to Director Calabria that in the ERCF “one of the things that doesn’t get credit is MI coverage that’s above the minimum level.”  Congressman Stivers and several representatives from both sides of the aisle also shared concerns that the ERCF would negatively impact and inhibit the CRT market.  Director Calabria committed to following up with Congressman Stivers to provide additional details on capital credit for greater MI coverage as well as credit for CRT.  Additionally, Chairwoman Maxine Waters (D-CA) as well as Representatives Nydia Velazquez (D-NJ), Bill Foster (D-IL), and Alma Adams (D-NC) shared concerns that the capital requirements outlined in the ERCF are excessive and could increase mortgage rates, especially for minority borrowers. Finally, there were a number of questions and comments related to the GSEs’ exit from conservatorship and other reforms that should happen prior to their exit. Representative Ted Budd (R-NC) questioned Director Calabria about the GSEs pilot programs, IMAGIN and EPMI, and asked, “[s]hould a GSE in conservatorship or in any state be permitted to set capital [standards] for counterparties and then compete against them in the primary market?” Director Calabria shared that this is a regulatory issue that was delayed by COVID-19, but that it is an issue the FHFA is committed to resolving. 

USMI Submits Comments on General Qualified Mortgage Definition. On September 8, USMI submitted comments to the Consumer Financial Protection Bureau (CFPB) for its proposed rule on the General Qualified Mortgage (QM) Definition. USMI urged the Bureau “to strike a proper balance between prudent and transparent underwriting standards, and access to affordable and sustainable mortgage finance credit for home-ready borrowers.” It further noted that the current proposed rule could limit access to the conventional market for traditionally underserved borrowers. In its letter, USMI recommended that the QM Safe Harbor should be set at 200 basis points (bps) above the Average Prime Offer Rate (APOR) to ensure the QM definition does not inadvertently limit access to credit for home-ready borrowers, particularly Black and Hispanic borrowers who are twice as likely to have spreads above the proposed 150 bps Safe Harbor threshold.

USMI also agreed with the Bureau’s assessment that a hard 43 percent debt-to-income (DTI) ratio would be the most harmful option for the General QM definition because it would severely limit access to credit in the conventional market. This assessment was consistent with USMI’s 2019 comment letter in response to the CFPB’s Advance Notice of Proposed Rulemaking (ANPR) on the QM Definition. Also consistent with its 2019 comment letter, USMI suggests a better approach to a General QM definition would be a standard that includes a higher DTI threshold up to 50 percent with specified compensating factors. 

USMI also urged the CFPB to allow sufficient time for a smooth transition from the temporary QM category, the “GSE Patch,” to the new General QM definition. In August, USMI submitted comments to the CFPB on the GSE Patch, recommending the Bureau set the sunset date for the GSE Patch to be at least six months after the effective date of the General QM definition final rule. USMI wrote that “this time will be critical given the extensive and still undetermined scope of COVID-19 on the financial services industry as it focuses resources on responding to the economic and health fallout from the pandemic.”

Coalition Urges CFPB to Increase the QM Safe Harbor Threshold. USMI also co-signed a joint industry trade letter with 11 other housing policy and consumer advocate groups calling on the CFPB to increase the QM Safe Harbor threshold from 150 to 200 bps over the current APOR. USMI previously discussed the need for increasing the Safe Harbor threshold to mitigate borrower impact in a blog post. USMI wrote that based on its analysis of “mortgage originations, loan performance, market dynamics, and the need to ensure consumer access to affordable mortgage finance, we recommend that this threshold should be pegged to the same threshold as the QM status, which the NPR suggests should be 200 bps.” Doing so would result in a more level playing field and by changing that threshold, would mitigate the impact on borrowers.

ICYMI: USMI Column Published in The Dallas Morning News. On August 17, USMI published its latest column titled, “The Smarter Way to Buy a Home.” USMI breaks down the 20 percent down payment myth and explains how private mortgage insurance can help home-ready buyers get in their house sooner. USMI also highlights that private mortgage insurance is temporary, unlike other low-down payment options. USMI notes that once the borrower reaches 20 percent equity in their house, private mortgage insurance cancels—which is a significant advantage to borrowers considering a low down payment mortgage. Read the column in The Dallas Moring News.