WASHINGTON — U.S. Mortgage Insurers (USMI) today announced that Derek Brummer will serve as the association’s new Chairman of the Board. Brummer is the President of Mortgage at Radian Group Inc. (NYSE: RDN). He succeeds Bradley Shuster, Executive Chairman of NMI Holdings, Inc. (Nasdaq: NMIH). Brummer’s appointment comes at a significant time as the Administration continues to take steps to reshape the government sponsored enterprises (GSEs), and the housing finance system responds to the current economic environment and the needs of homeownership during the novel coronavirus (COVID-19).
“For more than 60 years, the MI industry has helped American families become homeowners and has stood in front of mortgage credit risk that the government and taxpayers may otherwise have to bear. As sophisticated managers of mortgage credit risk and sources of dedicated private capital, MI companies serve a critical role in the U.S. housing finance system. As USMI’s Chairman, I look forward to ensuring the industry remains well-positioned to serve as an important source of strength for the housing finance system during all market cycles, so consumers continue to have access to affordable, low down payment, conventional mortgages,” said Brummer. “Over the last several years, more than 80 percent of first-time homebuyers have used low down payment mortgages. Today, these loans backed by private MI are more important than ever to enable borrowers to keep more cash on-hand, enabling those borrowers to purchase homes sooner than they otherwise could and begin to build the long-term wealth and stability that can come with homeownership.”
Brummer previously served as USMI’s Board Vice Chair. He was named Radian Group Inc.’s President of Mortgage in February and brings extensive experience in the housing industry to USMI’s chairmanship. Brummer joined Radian in 2002, serving as Chief Risk Officer since 2013 and as head of Mortgage Insurance and Risk Services since 2018. Prior to that, he was Chief Risk Officer and General Counsel for Radian’s financial guaranty company. Before joining Radian, Brummer was a corporate associate at Allen & Overy LLP as well as Cravath, Swaine & Moore LLP in New York.
“Derek’s experience and leadership in the mortgage insurance industry are invaluable assets to our industry association. We are excited to welcome and work with him as USMI’s new Chairman,” said Lindsey Johnson, President of USMI. “I want to also offer my deep gratitude to Bradley Shuster for his dedication and commitment to USMI as Chairman for the past two years. We greatly appreciate Brad’s efforts, which have been critical to the industry, and we value his continued role on our board of directors.”
Mark Casale, who is the President and CEO of Essent Guaranty, will take over as Vice Chairman of the Board of USMI, and Rohit Gupta, President and CEO of Genworth MI, will serve as USMI’s Treasurer and Secretary of the Board.
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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.
WASHINGTON—U.S. Mortgage Insurers (USMI) President Lindsey Johnson today issued the following statement on guidance provided by the Federal Housing Finance Agency (FHFA) and the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, to the Private Mortgage Insurer Eligibility Requirements (PMIERs), PMIERs 2020-01, effective June 30, 2020. PMIERs are a set of operational and risk-based capital requirements implemented in 2015 and updated in 2018 for private mortgage insurance (MI) companies to be approved to insure loans acquired by Fannie Mae and Freddie Mac.
“USMI supports the actions taken by federal policymakers, particularly the FHFA, to stabilize the economy and provide assistance to those who have been impacted by the COVID-19 pandemic,” said USMI President Lindsey Johnson. “USMI’s member companies are well-positioned to support the FHFA and GSEs’ efforts to ensure that homeowners who have been affected by COVID-19 are able to stay in their homes and maintain a safe and secure environment for their families.”
Today, USMI member companies are well capitalized, collectively holding more than $4.6 billion in excess of the minimum required assets as of March 31, 2020. The private MI industry provides dedicated entity-based capital support to the U.S. housing market and is uniquely positioned to continue serving as strong credit risk protection for the GSEs and taxpayers, and as a source of low down payment lending during COVID-19 and through the recovery.
The new PMIERs 2020-01 guidance provides, among other changes, additional clarity and special consideration for the risk-based treatment of loans affected by COVID-19. Under the 2018 update, a capital factor was introduced to differentiate mortgages subject to a GSE forbearance plan done in response to a Major Disaster Declaration from the Federal Emergency Management Agency (FEMA) due to natural disasters. This type of forbearance is often used for natural disasters such as hurricanes or other shorter-term disasters that occur in a specific geographic area, and generally have a definite period for the event. However, due to the unprecedented nature of the COVID-19 disaster, including its national scope and the ongoing duration of the health and economic effects, the PMIERs language needed additional clarity, which we are pleased FHFA, Fannie Mae, and Freddie Mac understood and provided.
“Through the combination of the industry’s entity-based equity capital, use of credit risk transfer, and strong underwriting and risk management, the private MI industry is well positioned to continue to serve as a source of strength in the housing finance system during this pandemic and the ensuing recovery,” continued Johnson.
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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.
“USMI appreciates the CFPB assessing what has happened in the marketplace since the general QM loan definition and temporary QM category (“GSE Patch”) were first implemented in 2014. Since then, market participants have originated mortgage loans with far greater diligence to ensure consumers have a reasonable ability-to-repay (ATR) and with more robust underwriting standards that have resulted in a much stronger housing finance system. The GSE Patch has also played a critical role in maintaining credit availability in the conventional market. As takers of first-loss mortgage credit risk with more than six decades of expertise and experience underwriting and actively managing that risk, USMI members understand the need to balance prudent underwriting with a clear and transparent standard that maintains access to affordable and sustainable mortgage finance credit for home-ready borrowers. USMI looks forward to reviewing and submitting comments on both rules.”
In September 2019, USMI submitted comments on the CFPB’s advance NPRM on the QM definition, offering specific recommendations for replacing the current GSE Patch to establish a single transparent and consistent QM definition in a way that balances access to mortgage finance credit and proper underwriting guardrails to ensure consumers’ ATR.
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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
WASHINGTON — U.S. Mortgage Insurers (USMI), the association representing the nation’s leading private mortgage insurance (MI) companies, today released its annual state-by-state report on low down payment mortgage lending. The report finds the number of low down payment loans backed by private MI increased 22.9 percent in 2019; meanwhile saving for a 20 percent down payment may take potential homebuyers 21 years to save — three times the length of time it could take to save a 5 percent down payment. USMI also found that the top five states for low down payment home financing with private MI were Texas, California, Florida, Illinois, and Ohio.
“Last year, over 1.3 million homeowners purchased a home or refinanced an existing mortgage with less than a 20 percent down payment using private mortgage insurance,” said Lindsey Johnson, president of USMI. “Given the current economic environment and the desire of many people to keep more cash on-hand, low down payment loans are more important than ever. Loans backed by private MI are a great option as a time-tested means for accessing homeownership sooner while still providing credit risk protection and stability to the U.S. housing system.”
The report examines the number of borrowers helped, the percentage of borrowers who were first-time homebuyers, average loan amounts, and average FICO credit scores. USMI also calculates the number of years to save a 20 percent versus a 5 percent down payment for each state plus the District of Columbia.
Key findings from the report:
It could take 21 years on average for a household earning the national median income of $63,179 to save for a 20 percent down payment (plus closing costs), for a $274,600 single-family home, the national median sales price.
The wait time decreases to 7 years with a 5 percent down payment insured mortgage — a nearly 67 percent shorter wait time at the national level.
In 2019, the number of homeowners who qualified for a mortgage because of private MI reached over 1.3 million, nearly 60 percent of purchase mortgages went to first-time homebuyers, and more than 40 percent had annual incomes below $75,000. The average loan amount purchased or refinanced with MI was $269,072.
Over the last five years, the role of private MI in the low down payment sector increased from 34.8 percent of the insured market in 2015 to 44.7 percent in 2019.
The below table shows the top five states in which MI was used by borrowers to purchase or refinance homes in 2019.
State
Number of Borrowers Helped with Private MI
First-Time Homebuyers
Texas
105,158
56 percent
California
103,120
68 percent
Florida
88,360
55 percent
Illinois
58,654
64 percent
Ohio
51,167
59 percent
Private MI serves as a bridge for creditworthy homebuyers to qualify for home financing despite a low down payment. It provides protection against mortgage default credit risk and is structured to protect the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, in the conventional mortgage market.
The complete report is available here, along with fact sheets for all 50 states and the District of Columbia.
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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.
WASHINGTON — Lindsey Johnson, President of U.S. Mortgage Insurers (USMI), today issued the following statement on the Federal Housing Finance Agency’s (FHFA) Re-Proposed Rule on Enterprise Capital:
“USMI supports meaningful and appropriate capital requirements for Fannie Mae and Freddie Mac (the GSEs) and appreciates the FHFA re-proposing a rule to achieve that goal. The Rule on Enterprise Capital is one of the most significant rules that FHFA will issue. The rule will determine the future role of the GSEs, how private capital will be able to continue to support the conventional market to protect taxpayers, and importantly, the level of access and affordability of mortgage finance credit for consumers.
“It is critical for the FHFA to create a capital framework for the GSEs that strikes an appropriate balance between maintaining borrowers’ access to affordable mortgage credit and ensuring the GSEs and taxpayers are protected from mortgage credit risk. To better shield taxpayers from mortgage credit risk, it is critical that capital requirements be tailored to the GSEs’ business operations, be counter-cyclical to withstand future downturns, and fully recognize the risk reduction associated with private mortgage insurance and equivalent forms of loan-level credit enhancement.
“In our 2018 comment letter on the original proposed capital rule, we also detailed a post-conservatorship capital regime for the GSEs to supersede the 2017 Conservatorship Capital Framework (CCF) that was then in effect. USMI specifically addressed three overarching areas within the proposed rule: 1) the Process and Transparency of the Development of the Proposed Framework; 2) the Overall Appropriateness of the Proposed Capital Requirements; and 3) the Treatment of Counterparties.
“USMI looks forward in reviewing this new re-proposed Enterprise Capital Rule that is very significant for our members, other participants in the housing finance industry, and the American public.”
The FHFA originally introduced the Rule on Enterprise Capital in 2018. USMI submitted a comment letter stating that its members support the goal of developing and implementing appropriate capital requirements for the GSEs that are clear, deliberative, and analytically justified.
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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.
WASHINGTON — Lindsey Johnson, President of U.S. Mortgage Insurers (USMI), today issued the following statement on the confirmation of Brian Montgomery by the United States Senate to serve as Deputy Secretary of the U.S. Department of Housing and Urban Development (HUD):
“USMI congratulates Deputy Secretary Brian Montgomery on his bipartisan Senate confirmation to help lead the U.S. Department of Housing and Urban Development (HUD). HUD serves as an important component of the more than $16 trillion U.S. outstanding mortgage debt market, and we know that Deputy Secretary Montgomery is deeply committed to HUD’s mission and to policies that support homeowners and renters.
“Deputy Secretary Montgomery is a respected, seasoned mortgage finance expert. His unique experience in both the private and public sectors, including his time as Assistant Secretary for Housing – Federal Housing Commissioner for HUD in the Donald Trump, George W. Bush, and Barack Obama administrations as well as his time as Acting HUD Secretary has been and will continue to be a major asset to the U.S. housing finance system. We are confident that Deputy Secretary Montgomery will help lead HUD and strengthen HUD’s programs and operations, and his leadership will be invaluable during these trying times in which his expertise and knowledge will be of great value.
“USMI and the private mortgage insurance industry look forward to working with Deputy Secretary Montgomery, Secretary Benjamin Carson, and other HUD leaders to establish a coordinated and robust housing finance system that prudently enables affordable homeownership for American families and also protects taxpayers from undue mortgage risk.”
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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
Below are reports that outline data USMI is watching that will directly or indirectly impact housing and the MI industry. Data is mainly focused on employment, mortgage forbearance and access to credit.
Consumer Financial Protection Bureau (CFPB) Director on QM Rule. On January 17, CFPB Director Kathy Kraninger sent a letter to select members of Congress notifying them of the CFPB’s intentions to eliminate the debt-to-income (DTI) ratio requirement and move to a standard based on an alternative metric, specifically a pricing threshold. She wrote that the CFPB would extend the QM definition “for a short period until the effective date of the proposed alternative or until one or more of the GSEs [government sponsored enterprises] exits conservatorship, whichever comes first.” As for the DTI requirement, Director Kraninger proposed replacing it for a pricing threshold, such as the difference between the loan’s annual percentage rate (APR) and the average prime offer rate (APOR) for a comparable transaction (the APOR-approach).
Industry and Consumer Groups Call for Maintaining Prudent Underwriting Guardrails as Part of QM Patch Replacement. In response, on January 21, USMI joined eight other organizations on a letter to Director Kraninger recommending the CFPB replace the current QM definition with one that relies on measurable underwriting thresholds and the use of compensating factors (such as liquid reserves, limited payment shock, and/or a larger down payment from the borrower’s own funds) for higher risk mortgages (those loans with DTI ratios above 45 and up to 50 percent). This letter goes on to explain how alternative recommendations (e.g., using pricing thresholds) would have a negative impact on minority and lower income borrowers and should be avoided through the better approach of relying on other compensating factors that enable prudent underwriting and affordable access to credit.
The organizations also urged “that the transition period from the existing GSE Patch to the new QM framework be sufficiently long to allow market participants adequate time to plan for, and adjust to, new rules and underwriting standards” in order to avoid the risks of regulatory uncertainty “that might cause mortgage originators to retreat from lending to creditworthy homebuying and refinancing borrowers.”
Kraninger Testifies before House Financial Services Committee. On February 6, Director Kraninger testified before the House Committee on Financial Services where the discussion on the QM definition continued. Representatives Nydia M. Velasquez (D-NY), Brad Sherman (D-CA), French Hill (R-AR), Warren Davidson (R-OH), Alma Adams (D-NC), and Anthony Gonzalez (R-OH) all raised questions on the CFPB’s plan to replace the DTI requirement and its potential impact on the housing finance market and on low-to-moderate income borrowers’ access to safe and affordable mortgage finance credit. When asked on the timing for the release of the QM Notice of Proposed Rulemaking (NPR), Director Kraninger responded “no later than May,” which was affirmed this week by the Bureau when it formally announced it will issue proposed changes to the QM definition by May. Director Kraninger said, “[t]he bureau will propose an alternative, such as a pricing threshold, to better ensure that responsible, affordable mortgage credit remains available to consumers.” If you have not read it yet, USMI released a blog last year with observations and recommendations for replacing the QM and balancing prudent underwriting with borrower access to affordable mortgage finance in the conventional market.
USMI Speaks on QM “in a Post-Patch World.” On February 18, USMI President Johnson spoke at a panel co-hosted by the Mortgage Bankers Association (MBA) and Women in Housing Finance (WHF) on the future of QM after the expiration of the QM Patch. The panel discussed how the housing industry could change in the near future and the roles that other housing intuitions, like private mortgage insurance (MI), will play in supporting a vibrant housing industry.
USMI President Lindsey Johnson at Structured Finance Association (SFA). This week, USMI President Johnson, along with Pete Carroll from Core Logic, Andrew Davidson from Andrew Davidson & Co., Rajiv Kamilla from Goldman Sachs, Larry Platt from Mayer Brown, and Jeremy Switzer from Penny Mac, spoke on a panel at SFA’s conference in Las Vegas titled, “Building Industry Governance for the PLS Market.” Johnson discussed the important governance changes and enhancements in quality controls and industry practices and regulation that have occurred in the conventional market that would greatly benefit the private label security (PLS) market, including the underwriting criteria that have developed under the QM Patch. Johnson also spoke about the role private MI can play to bring greater credit quality assurances and ensure prudent risk management in the PLS market.
Federal Housing Finance Agency Moves Ahead with Plans to End Conservatorship. On February 3, FHFA awarded the investment bank Houlihan Lokey Inc. a potential $45 million advisory contract to help recapitalize the GSEs as part of the government’s plan to end their conservatorships. FHFA Director Mark Calabria stated “[h]iring a financial advisor is a significant milestone toward ending the conservatorships of the enterprises,” adding that “[t]he next major milestone for the FHFA is the re-proposal of the capital rule, which will happen in the near future.”
FHFA Issues a Request for Input (RFI) on Federal Home Loan Bank (FHLBank) Membership. Earlier this week, the FHFA issued a RFI for FHLBank membership, in which it seeks input “on whether the FHFA’s existing regulation on FHLBank membership ensures the FHLBank System, consistent with statutory requirements, remains safe and sound, provides liquidity for housing finance through the housing and business cycle, and supports the FHLBanks’ housing finance and community development mission.”
Administration and Congress Take Action on Housing Affordability. Yesterday, the FHFA announced the authorization of payments for 2019 from the GSEs to the Department of Housing and Urban Development (HUD) for the Housing Trust Fund and Treasury for the Capital Magnet Fund. The Housing Trust Fund, an affordable housing program designed to increase and preserve the supply of decent, safe, and sanitary affordable housing for extremely low- and very low-income households, received $326.4 million and the Capital Magnet Fund, a program focused on the developments, preservation, rehabilitation, and purchase of housing for low income families, received $175.8 million. Congress also took steps this week to explore housing affordability and the House Financial Services Committee marked up and approved four bills concerning housing and community development:
H.R. 5931, the “Improving FHA Support for Small Dollar Mortgages Act of 2020” (Clay-Stivers), would require FHA to conduct a review of its policies to identify barriers to supporting mortgages under $70k and report to Congress within one year with a plan for removing such barriers. The bill was reported favorably to the House by a recorded vote of 48 to 0.
H.R. 149, the “Housing Fairness Act of 2020” (Rep. Green), would authorize increased funding for HUD’s Fair Housing Initiatives Program in addition to creating a new competitive matching grant program to support comprehensive studies of the causes and effects of ongoing discrimination and segregation, and the implementation of pilots to test solutions. The bill was reported favorably to the House by a recorded vote of 33 to 25.
H.R. 4351, the “Yes in My Backyard Act” (Rep. Heck), would require localities receiving CDBG funding to submit a plan to track and report on the implementation of certain land use policies that promote housing production. The bill was agreed to and reported favorably to House by a voice vote.
H.R. 5187, the “Housing Is Infrastructure Act” (Chairwoman Waters), would authorize $100.6 billion for investments in the nation’s affordable housing infrastructure, including public housing, supporting housing for seniors and people with disabilities, making housing affordable to the lowest-income people, and rural and Native American housing. The bill was reported favorably to the House by a recorded vote of 33 to 25.
Dana Wade Nominated as Federal Housing Administration (FHA) Commissioner. On February 20, the White House announced President Trump’s intent to nominate Dana Wade as FHA Commissioner and oversee the agency’s $1.3 trillion portfolio. USMI President Lindsey Johnson issued a statement applauding the nomination, stating that USMI “look[s] forward to working closely with Dana Wade in seeking ways to establish a more complementary, collaborative, and consistent housing finance system that prudently enables homeownership for American families while also protecting taxpayers.”
USMI President Lindsey Johnson on the FHA Insurance Fund.Scotsman Guide shared USMI President Lindsey Johnson’s views on the current health of the FHA insurance fund in an article on the wider industry debate surrounding the FHA’s insurance fund. Johnson noted that the insurance fund is highly vulnerable to market changes, adding that “[t]axpayers are currently exposed to over $1.19 trillion in outstanding mortgage risk at the FHA. This would only increase if FHA insurance premiums were reduced. Also, any change to FHA’s life-of-loan coverage would mean exposing taxpayers to further undo risk.”
ICYMI: Extension of the MI Tax Deduction. In January, Congress passed the Further Consolidated Appropriations Act of 2020, which retroactively extended tax deductions for mortgage insurance premiums to calendar year 2018 and remains in effect throughout 2020. USMI President Lindsey Johnson issued a statement praising the extension saying, “[w]e are pleased Congress extended the mortgage insurance tax deduction for years 2018 through the end of 2020. Private MI has helped more than 30 million middle-income Americans become homeowners over the last 60 years, and for over 10 years the deductibility of mortgage insurance has helped benefit millions of these hard-working borrowers.” According to the most recent IRS statistics of income, in 2017 alone more than 2.285 million taxpayers benefited from the MI premium tax deduction. The deduction is available to homeowners (married filing jointly) with MI who have adjusted gross incomes under $100,000 and phases-out for adjusted gross incomes up to $110,000. Earlier this week, the IRS issued a news release (IR-2020-44) describing the procedure for taxpayers to claim benefits of for expired provisions for already-closed tax years. According to guidance from the IRS, homeowners seeking to retroactively claim a tax deduction for mortgage insurance premiums for tax year 2018 will need to file an amended return using form 1040-X.
WASHINGTON — Lindsey Johnson, President of the U.S. Mortgage Insurers (USMI), today issued the following statement on the nomination of Dana Wade to serve as Federal Housing Commissioner:
“USMI applauds the White House’s announcement of the President’s intent to nominate Dana Wade as the Federal Housing Commissioner to lead the Federal Housing Administration (FHA) and oversee the agency’s $1.3 trillion portfolio. Wade is a respected expert with broad experience in financial and housing policy issues. Her previous work, including her time as Acting Federal Housing Commissioner and Assistant Secretary for Housing, will allow her to swiftly start to address the important issues facing the housing finance system. We look forward to working closely with Dana Wade in seeking ways to establish a more complementary, collaborative, and consistent housing finance system that prudently enables homeownership for American families while also protecting taxpayers.”
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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.
USMI President Lindsey Johnson appeared on “Best Real Estate Investing Advice Ever” with Joe Fairless to discuss her background in mortgage finance and the role of private mortgage insurance in today’s mortgage system.
The Honorable Kathleen L. Kraninger Director Consumer Financial Protection Bureau 1700 G Street NW Washington, DC 20552
Dear Director Kraninger:
The undersigned organizations are writing in response to the Consumer Financial Protection Bureau’s (Bureau) rulemaking regarding the definition of a Qualified Mortgage (QM). Our organizations represent diverse housing finance stakeholders, including consumer groups, lenders, and mortgage insurers, and we appreciate the opportunity to provide our joint perspectives in addition to our individual comment letters that were submitted in response to the Bureau’s Advance Notice of Proposed Rulemaking (ANPR). The Ability-to-Repay (ATR) rule in the Dodd-Frank Wall Street Reform and Consumer Protection Act is one of the most important consumer safeguards in the legislation, and the Bureau’s regulations to promulgate and execute it will directly affect access to safe and affordable mortgage finance credit. We all agree that maintaining access to affordable and sustainable mortgage credit should be a key objective of the Bureau’s revised rulemaking.
We appreciate the Bureau’s thoughtful approach to assessing and implementing potential changes to the QM definition. This letter contains our joint recommendation that the Bureau implement a QM definition that relies on measurable underwriting thresholds and the use of compensating factors for higher risk mortgages rather than either a pricing-based QM definition that uses the spread between the annual percentage rate (APR) and the Average Prime Offer Rate (APOR) as a proxy for underwriting requirements (the “APOR approach”) or a hard cut-off at either 43% or 45% DTI.
Specifically, this coalition strongly supports:
1. The continued use of a modified debt-to-income (DTI) ratio in conjunction with certain compensating factors, which could be used in the underwriting process and would provide guidance to creditors on their use; and
2. Significant changes to Appendix Q to rely on more flexible and dynamic standards for calculating income and debt.
Compensating Factors Would Enable Prudent Underwriting and Affordable Access to Credit
The Bureau should establish a set of transparent mitigating underwriting criteria – “compensating factors” – for mortgages with DTI ratios above 45% and up to 50%. While DTI is not the most predictive factor in assessing a borrower’s ability to repay, it can, in concert with compensating factors, function as a bright line that mitigates undue risk in the conventional market while continuing to provide affordable access to mortgage finance for creditworthy borrowers. Moreover, DTI is a widely and commonly used metric when considering a borrower’s ability to repay in mortgage loan underwriting and is the standard in the current rule issued in 2013. While a higher DTI may indicate increased stress for the borrower and a consequent strain on ability to repay, the presence of other positive credit characteristics – such as liquid reserves, limited payment shock, and/or a down payment from the borrower’s own funds – can mitigate the heightened risk and limit the risk layering that drives loan nonperformance. In fact, the automated underwriting systems (AUSs) used by Fannie Mae and Freddie Mac (the GSEs), as well as proprietary AUSs used by primary market lenders, have always used compensating factors to assess borrowers’ ATR, and such a multifactor approach has long been the standard for manual underwriting throughout the industry.
The efficacy of using compensating factors for high-DTI mortgages is demonstrated by the track record of loans acquired by the GSEs. Rather than introducing undue risk to the housing finance system, these loans have performed well. In fact, high-DTI loans (with ratios between 45.1% and 50%) underwritten using compensating factors outperform loans with lower DTI ratios (between 35.01% and 45%). The lower delinquency rates on the higher DTI loans are almost certainly due to the presence of appropriate compensating factors in the GSEs’ AUSs.
The table below reflects one specific set of compensating factors we believe are appropriate for borrowers with DTIs above 45% and up to 50% that could be tailored for the revised rule. These recommendations are based on: (1) internal analysis and efforts to “back into” the compensating factors currently used by the GSEs to avoid a dramatic shift in the market; and (2) known factors that significantly impact borrowers’ ATR. This is by no means an exhaustive list and we welcome further discussion about compensating factors and their respective predictiveness. The Bureau’s final rule on the QM definition could authorize the GSEs, Federal Housing Finance Agency (FHFA), or an independent standard-setting entity to formulate a transparent list of compensating factors and should make the underlying data and analysis available to the public for ongoing review and assessment to ensure that dynamic compensating factors can be updated to reflect changes in the market and mortgage credit risk environment.
Using an APOR-Only Approach Does Not Meet the Legislative Intent of the Statute and Does Not Appropriately Measure Ability to Repay
The APOR approach is premised on the faulty idea that pricing fully captures credit risk and that, in turn, credit risk is a reasonable marker for ability to repay. In the mortgage industry, a loan’s pricing reflects a number of factors outside of an individual borrower’s credit profile, including a lender’s balance sheet capacity, prepayment speeds, the value of mortgage servicing rights, business goals, and broader economic considerations. With regard to risk, pricing does consider down payment and credit score, but often fails to capture risk-mitigating characteristics such as borrower reserves, DTI ratios, and payment shock.
Any QM definition that relies solely on the statutory ATR requirements or the price of a loan will be seriously flawed. ATR requirements are too broad and do not adequately reflect a borrower’s ability to repay. On the other hand, a loan’s price can be manipulated to gain QM safe-harbor status.
There are several important consumer protection concerns at issue. First, loans made within the QM safe harbor are not, practically speaking, subject to underwriting thresholds/requirements for determining ATR because if a loan meets the product feature requirements along with any other adopted QM standards, no adjudicative body or regulator can “look under the hood” and examine the fuller underwriting process.
Second, if the only underwriting protection is APOR, mortgages could be made to financially vulnerable borrowers at a price just below the safe harbor threshold even though the borrowers’ financial/credit profiles might otherwise call for greater underwriting analysis consideration and ATR protections. This mispricing of risk helped set the 2008 financial crisis in motion.
Third, using this approach assumes creditors are able to uniformly and accurately price risk of repayment, an assumption that was disproven in the financial crisis and ignores market and economic pressures that can drive underpricing of risk.
Fourth, an APOR approach could increase risk within the mortgage finance system as APOR is a trailing indicator of risk and can be procyclical. Therefore, periods of sharply rising rates could cause temporary suspensions in lending that could impact prime loans with higher risk attributes. Additionally, during periods of low rates and loose credit, borrowers run the risk of being overextended.
An APOR Approach Could Make It Harder for Creditworthy Low Down Payment and Minority Borrowers to Obtain Mortgages
Moving from a DTI-based QM standard to an APOR approach could reduce the ability of low down payment and minority borrowers to obtain conventional mortgages. For example, based on 2018 Home Mortgage Disclosure Act (HMDA) data, $11-12 billion in GSE purchase origination volume had loan-to-value (LTV) ratios of >80% and APRs with spreads in excess of APOR + 150 basis points. Further, based on the same dataset, African American and Hispanic borrowers were twice as likely as white borrowers to have mortgages with APRs in excess of the APOR + 150 basis points safe harbor spread.
Many qualified borrowers who are not able to obtain mortgages that meet an APOR standard under a revised QM definition would be denied access to homeownership opportunities while other qualified borrowers in this category would see their loan options reduced. Some mortgages that would normally have been made in the conventional market would gravitate towards the 100% taxpayer-backed FHA, an outcome that is inconsistent with the Administration’s housing finance reform principles and objectives as articulated in the September 2019 reports from the Department of the Treasury and the Department of Housing and Urban Development.
Regardless of the solution chosen, we urge that the transition period from the existing GSE Patch to the new QM framework be sufficiently long to allow market participants adequate time to plan for, and adjust to, new rules and underwriting standards. Any transition to a new QM rule ought to be smooth and well thought-out. Otherwise it risks regulatory uncertainty that might cause mortgage originators to retreat from lending to creditworthy homebuying and refinancing borrowers.
Thank you again for the opportunity to share our collective perspectives on the Bureau’s work regarding the QM definition. The expiration of the GSE Patch and what is developed to replace it will have significant implications for consumers’ access to affordable and sustainable mortgage finance credit. We hope to have a continued constructive dialogue through a robust comment process to result in the best future standard and we welcome the opportunity to serve as resources as the Bureau works toward a proposed, and then final, rule.
Sincerely,
Consumer Federation of America Community Home Lenders Association The Community Mortgage Lenders of America Independent Community Bankers of America National Association of Federally-Insured Credit Unions National Association of REALTORS® National Community Stabilization Trust National Consumer Law Center (on behalf of its low-income clients) U.S. Mortgage Insurers
CC: Andrew Duke Brian Johnson Mark McArdle Kirsten Sutton Thomas Pahl
WASHINGTON — U.S. Mortgage Insurers (USMI) President Lindsey Johnson issued the following statement on the decision made by the U.S. Congress to extend the tax deduction for mortgage insurance (MI) premiums in the H.R.1865 – Further Consolidated Appropriations Act, 2020.
“We are pleased Congress extended the mortgage insurance tax deduction for years 2018 through the end of 2020. Private MI has helped more than 30 million middle-income Americans become homeowners over the last 60 years, and for over 10 years the deductibility of mortgage insurance has helped benefit millions of these hard-working borrowers—the majority of whom made annual incomes of less than $75,000.
“This tax deduction was first available to taxpayers in 2007 and extended multiple times since then on a bipartisan basis. The last deduction expired at the end of 2016, and with this last extension for amounts paid or accrued after December 31, 2017, and before December 31, 2020, lawmakers demonstrate their commitment towards helping low-down payment and first-time homebuyers.
“Over the last six decades, private MI has bridged the gap between a 20 percent down payment and access to mortgage finance credit. In the past year alone, MI helped more than 1.2 million homeowners purchase or refinance homes.”
According to the most recent IRS statistics of income, in 2017 alone more than 2.285 million taxpayers benefited from the MI premium tax deduction. The deduction is available to homeowners with MI who have an adjusted gross income under $100,000 and phases-out for adjusted gross incomes up to $110,000. USMI data show that nearly 60 percent of purchase loans with private MI go to first-time homebuyers and more than 40 percent of borrowers with private MI have incomes below $75,000.
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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.
