Author: dcadmin

Newsletter: September 2019

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Congress is back from recess, Pumpkin Spice lattes are back on the menu, and housing finance reform is back at the top of news headlines in Washington this fall. In September, the Trump Administration released plans to reform the nation’s housing finance system. USMI issued a statement applauding the initiative and calling for Congress to address the GSEs’ underlying structural challenges and promote a coordinated federal housing policy. The Senate Banking Committee also held a hearing on the matter to learn more about the Administration’s Plans. The same week that the Administration released its Plans, the Fifth Circuit ruled in favor of GSE shareholders in their lawsuit against the U.S. Treasury, as the court allowed the shareholders to reinstate claims alleging that FHFA is unconstitutionally structured. While the fate of the legal challenges is still unclear, what is clear is that FHFA is moving ahead on many of its plans to review and make changes to the current programs and activities of the GSEs. Last week, FHFA announced an increase to the caps on the amount of multifamily loans the GSEs can purchase next year, and just this week FHFA announced an end to the GSEs’ pilots to offer lines of credits to non-bank servicers that pledge agency mortgage servicing rights (MSRs) as collateral. Additionally, the CFPB closed its comment period on its Advance Notice of Proposed Rulemaking (ANPR) this week on the “Qualified Mortgage Definition under the Truth in Lending Act.” USMI submitted comments outlining several recommendations to the Bureau to balance prudent underwriting with consumers’ access to mortgage finance credit. Lastly, the House Financial Services Committee held a markup on several housing related bills, including legislation to reauthorize the HUD to implement credit scoring pilots in the underwriting process for FHA insured mortgages.

  • The Trump Administration’s Housing Finance Reform Plans. On September 6, the U.S. Treasury Department and the U.S. Department of Housing and Urban Development (HUD) released their comprehensive Housing Reform Plan and Housing Finance Reform Plan to end the federal conservatorships of the government sponsored enterprises (GSEs), which have lasted more than 11 years. USMI released a statement that applauds Treasury and HUD for their comprehensive plans and calls for Congress to address the underlying structural challenges of the GSEs. USMI wrote, “the Administration’s proposals to reduce taxpayer risk exposure and address the areas of misaligned incentives of the GSEs while increasing transparency and market discipline could be the catalyst to break the legislative logjam and enable policymakers to enact comprehensive reforms.” USMI also appreciates that Treasury and HUD identified specific areas where the Administration can focus its efforts to put the housing finance system on a more sustainable path. Many of the actions proposed by the Administration’s Plans align with USMI’s principles for Administrative Reform, including increasing transparency in the housing finance system and expanding the role of private capital ahead of taxpayer risk.
  • Senate Banking Committee Hearing. After the release of the Administration’s Plans, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing on September 10 titled “Housing Finance Reform: Next Steps,” in which HUD Secretary Ben Carson, Treasury Secretary Steve Mnuchin, and Federal Housing Finance Agency (FHFA) Director, Mark Calabria, delivered their testimonies and answered questions from committee members.

    All three Administration officials reiterated the need for Congress to provide input on reform, inviting the Legislative Branch to take a leadership role. Treasury Secretary Mnuchin said, “[p]ending legislation, Treasury will continue to support FHFA’s administrative actions to enhance the regulation of the GSEs, promote private sector competition, and satisfy the preconditions set forth in the plan for ending the GSEs’ conservatorships.” FHFA Director Mark Calabria also noted that “[the GSEs] have expanded with the economy recently yet maintained risk and capital levels that ensure they will fail in a downturn. This pro-cyclical pattern harms low-income borrowers, making it easier to buy homes beyond their means when the economy is strong and harder to keep those homes when the economy is weak.”

    Chairman Crapo (R-ID) said in his opening statement that “[m]any of the legislative recommendations in the Plans that were released are consistent with my outline to fix our housing finance system, including attracting private capital back into the market; protecting taxpayers against future bailouts; and promoting competition.” Ranking Member Brown (D-OH) summarized the foundational principles for reform around which housing stakeholders are coalescing and added that “[w]e need a housing system built on a mission to serve borrowers and renters, no matter who they are, what kind of work they do, or where they live. That means we need policies that focus on increasing service for underserved markets, like rural areas and manufactured homeowners, and borrowers who have been locked out of the housing market over decades of discrimination.”

  • Fifth Circuit rules on FHFA. On September 9, the Fifth Circuit ruled in favor of investors suing the U.S. Treasury Department, allowing them to proceed with previously dismissed claims alleging the FHFA exceeded its authority with “net worth sweep.” “Congress created FHFA amid a dire financial calamity, but expedience does not license omnipotence,” U.S. Circuit Judge Don R. Willett wrote for a nine-member majority. “The shareholders plausibly allege that the Third Amendment exceeded FHFA’s conservator powers by transferring Fannie and Freddie’s future value to a single shareholder, Treasury.” The case will now be discussed in a Texas federal court where it was originally filed in 2016. The court will decide whether the restored investor claims should go to trial or be resolved on summary judgement.
     
  • FHFA increases GSEs multifamily lending caps and ends GSE MSR Pilot Program. On September 16, the FHFA increased caps on the amount of multifamily loans the GSEs can purchase next year. FHFA will now limit Fannie Mae and Freddie Mac to purchasing over $100 billion each -up from $35 billion each in the years 2018 and 2019- in multifamily-housing residential loans, between the fourth quarters of 2019 and 2020. FHFA also made other revisions to how the GSEs can conduct their multifamily businesses, now requiring that the two firms must have over one-third (37.5 percent) of their multifamily activities directed toward affordable housing. Furthermore, the new lending caps eliminate exclusions that allowed the GSEs to purchase loans in excess of the limits previously in place.

    “Multifamily housing is a critical component of addressing our nation’s shortage of affordable housing,” said FHFA Director Mark Calabria. “These new multifamily caps eliminate loopholes, provide ample support for the market without crowding out private capital, and significantly increase affordable housing support over previous levels. The Enterprises should also manage under the caps to provide consistent, stable liquidity to the market throughout the entire five-quarter period.” 

    Earlier this week, FHFA announced an end to the GSEs’ pilot program to finance MSRs. It was reported on May 7, that Freddie Mac had provided lines of credit for several nonbank servicers. In making the announcement, Director Calabria noted “[t]he MSR market is already served by a wide assortment of highly competitive private sources of capital and financing. Going forward, the Enterprises should focus on activities that are core to the guaranty business, mitigate risk, and are essential to end the conservatorships.”

  • CFPB closes comment period on QM definition. On September 16, the Consumer Financial Protection Bureau (CFPB) closed its comment period on its ANPR on the “Qualified Mortgage (QM) Definition under the Truth in Lending Act,” in light of the pending expiration of the provision commonly referred to as the “GSE Patch” in January 2021. USMI applauded the CFPB’s initiative of undertaking an assessment of this critical rule. It submitted a comment letter offering specific recommendations for replacing the current “GSE Patch” to establish a single transparent and consistent QM definition in a way to balance access to mortgage finance credit and proper underwriting guardrails to ensure consumers’ ability-to-repay (ATR). USMI’s recommendations include:

    • Maintaining the ATR and product restrictions as part of any updates to the QM definition to ensure discipline in the lending community and to protect consumers;
    • Retaining specific underwriting guardrails such as a debt-to-income (DTI) threshold but notes that DTI should not be a stand alone factor for ATR. Further, the USMI comment letter demonstrates through data that the DTI threshold should be adjusted to better serve consumers;
    • Because DTI should not be a stand along measure of ATR, USMI recommends developing a single set of transparent compensating factors for loans with DTIs above 45 and up to 50 percent for defining QM across all markets, similar to how the GSEs, FHA, and VA use compensating factors in their respective markets today.

      Importantly, nine Democratic U.S. Senators led by Senate Banking Ranking member Sherrod Brown sent a letter to the Bureau stating that as it considered amending the existing QM rule, the Bureau “must not undermine the elements of the rule that have made it effective: prohibitions on unsustainable product features and a verifiable demonstration at loan origination that the lender has evaluated the borrower’s ability to repay their loan.”

      Other associations and entities such as the National Association of Hispanic Real Estate Professionals (NAHREP), National Association of Home Builders, Digital Federal Credit Union, National Association of Federally-Insured Credit Unions (NAFCU), CNB Bank, International Bancshares Corporation, Wisconsin Credit Union League, Highlands Residential Mortgage, among others, share similar views as USMI that setting transparent compensating factors will help expand credit availability for many potential homeowners who may otherwise be left behind.

  • House Financial Services Committee Markup. On September 18-20, the U.S. House of Representatives Committee on Financial Services, held a markup hearing in which, along with several issues, they discussed H.R. 123, the “Alternative Data for Additional Credit FHA Pilot Program Reauthorization Act,” and reported the legislation favorably to the House with a 32-22 vote. This bill would reauthorize the HUD statutory authority to implement a pilot program to increase credit access for borrowers with thin or no credit files through the use of additional credit data in the underwriting for FHA-insured mortgages.

Press Release: USMI Submits Comments to CFPB’s Advance Notice of Proposed Rulemaking on the Qualified Mortgage Definition

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WASHINGTON — Lindsey Johnson, President of U.S. Mortgage Insurers (USMI), today released the following statement on the organization’s comment letter submitted in response to the Consumer Financial Protection Bureau’s (“the Bureau”) Advance Notice of Proposed Rulemaking on the “Qualified Mortgage (QM) Definition under the Truth in Lending Act (Regulation Z).”

“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. The upcoming expiration of the temporary QM category, often referred to as the ‘GSE Patch,’ provides an important opportunity for the Bureau to assess what has developed within the marketplace since the enactment of the QM Rule. Notably, mortgage lending has been done with far greater diligence by market participants to ensure consumers have a reasonable ability-to-repay (ATR) and has resulted in a much stronger housing finance system. Further, the GSE Patch has played a critical role in maintaining credit availability. In our comments to the Bureau, we offer specific recommendations for replacing the current GSE Patch to establish a single transparent and consistent QM definition in a way to balance access to mortgage finance credit and proper underwriting guardrails to ensure consumers’ ATR. USMI’s recommendations include:

  • Maintaining the ATR and product restrictions as part of any updates to the QM definition to ensure discipline in the lending community and to protect consumers;
  • Retaining specific underwriting guardrails such as the current debt-to-income (DTI) component of the QM definition, but modifying the specific threshold to better serve consumers; and
  • Developing a single set of transparent compensating factors for loans with DTIs above 45 and up to 50 percent for defining QM across all markets, similar to how the GSEs, FHA, and VA use compensating factors in their respective markets today.

“Retaining specific thresholds in measuring a consumer’s income, assets, and financial obligations better serves consumers and ensures that the statutory and regulatory intent of measuring a consumer’s ATR is met. Further, adjusting the current DTI limit from 43 percent to 45 percent for all loans, and up to 50 percent for loans with accompanying compensating factors creates a more transparent and level playing field that provides greater certainty for borrowers and lenders and reduces the impact of the expiration of the GSE Patch. USMI believes that the development of a single transparent industry standard will facilitate greater consistency across all lending channels and ensure there is not market arbitrage to achieve QM status.

“USMI applauds the Bureau for undertaking the necessary process for updating this critical rule that is aimed at enhancing lending standards and consumer protection. We look forward to working with the Bureau as it seeks to implement any changes to this important rule.”

Following the release of the Bureau’s ANPR in July, USMI published a blog with observations and recommendations for replacing the GSE Patch.

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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.

Podcast: President Lindsey Johnson on ‘Engage with Andy Busch’

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USMI President Lindsey Johnson appeared on the ‘Engage with Andy Busch’ podcast to discuss the current state of housing, how the mortgage market is structured and how the private sector provides a backstop. They also cover the GSEs, what happened to them in 2008, what conservatorship looks like, and what are the potential changes coming for FNMA and Freddie Mac.

 

Listen now.

Statement: The Administration’s Housing Finance Reform Reports

Posted on by dcadmin

WASHINGTON — Lindsey Johnson, President of U.S. Mortgage Insurers (USMI), today issued the following statement on the Administration’s Housing Finance Reform reports to address the nation’s housing finance system, including the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.
 
“USMI applauds the U.S. Treasury Department (Treasury) and the Department of Housing and Urban Development (HUD) for releasing their comprehensive Housing Reform Plan and Housing Finance Reform Plan (“Plans”) that together outline needed reforms to the housing finance system.  While USMI looks forward to reviewing the Plans in greater detail, we particularly appreciate Treasury and HUD identifying specific areas where the Administration can focus its efforts to put the housing finance system on a more sustainable path ahead of comprehensive legislative reform.
 
“While Congress ultimately needs to address the underlying structural challenges of the GSEs, the Administration’s proposal to reduce taxpayer risk exposure and address the areas of misaligned incentives of the GSEs while increasing transparency and market discipline could be the catalyst to break the legislative logjam and enable policymakers to enact comprehensive reforms.  Many of the actions proposed by the Administration’s Plans align with USMI’s principles for Administrative Reform, including our position that these actions could further reduce taxpayer risk by increasing private capital within the financial system, level the playing field between the GSEs and private market participants, provide greater transparency regarding GSE pricing and practices, and ensure that consumers have access to affordable and sustainable mortgage finance credit.
 
“Further, the Plans call for the Federal Housing Finance Agency (FHFA) and HUD to develop and implement a specific understanding as to the appropriate roles and overlap between the GSEs and the Federal Housing Administration (FHA).  USMI has long called for a consistent housing policy across different agencies and for greater coordination between the government-backed FHA market and the conventional market, and we look forward to working with the Administration as it seeks to define these important roles. 
 
“USMI is encouraged by the thoughtful and comprehensive Plans released today by the Administration and looks forward to working with the Administration to promote private capital ahead of taxpayer risk, instill greater transparency and market discipline within the housing finance system, and ensure Americans continue to have access to safe and affordable mortgage finance options.”
 
Last fall, USMI released a white paper on administrative reform (available for download here) that outlined 11 key recommendations for policymakers to consider when contemplating the future of housing finance. A PDF of these recommendations can be downloaded 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.

Newsletter: August 2019

Posted on by dcadmin

As the August recess begins, there have been several notable developments in housing finance. Last Thursday, the Consumer Financial Protection Bureau (CFPB) released its Advanced Notice of Proposed Rulemaking on the “Qualified Mortgage (QM) Definition under the Truth in Lending Act” which seeks to revise the QM definition as the GSE Patch nears expiration. Moody’s Investor Service released a proposed update to its residential mortgage-backed security (RMBS) rating methodology which would affect the rating for bonds associated with the GSEs’ CRT transactions and non-agency RMBS. Importantly, the new standard recognizes the loss reducing benefits of private mortgage insurance (MI). The Urban Institute published an article highlighting private MI and the benefits of reducing the severity of losses for those holding mortgage credit risk.

Also, on the regulatory front, as many financial institutions look to implement the Financial Accounting Standards Board’s (FASB) Current Expected Credit Loss (CECL) accounting standard, FASB has announced proposed changes, including delaying the implementation deadline for private companies as well as small public companies. USMI released an update on the treatment of loan level credit enhancement provided under the CECL standard, providing information to lenders of all sizes on how they might mitigate loss reserve requirements under the new standard. Housing finance reform continues to gain attention in recent weeks with Federal Housing Finance Agency (FHFA) Director Mark Calabria recently giving an update on the timing of the release of the Administration’s plans to reform the housing finance system. Lastly, there have been a number of studies and reports in recent weeks that continue to cite consumers’ misperception that they need a large down payment to qualify for homeownership. USMI published a new column that highlights low down payment mortgage options available to help home-ready borrowers attain sustainable homeownership sooner.

  • CFPB’s ANPR on Qualified Mortgages. On July 25, the CFPB released an Advanced Notice of Proposed Rulemaking on the “Qualified Mortgage Definition under the Truth in Lending Act.” The CFPB is considering whether to revise the QM definition in light of the pending expiration of the Temporary GSE QM loan category provision, commonly referred to as the “GSE Patch,” in January 2021. The same statutory product restrictions exist for loans under the Patch as for other QM loans, however these loans are not subject to the 43 percent debt-to-income (DTI) limit—a significant exception that has supported a substantial portion of the overall housing 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 using a clear and transparent standard to ensure sustainable lending with the need to maintain access to affordable mortgage finance credit for home-ready borrowers. Following the release of the ANPR, USMI published a blog with observations and recommendations for replacing the GSE Patch.

  • Moody’s releases proposed update to RMBS ratings. Moody’s recently released a proposed update to its RMBS rating methodology which would affect the rating for bonds associated with the GSEs’ CRT transactions and non-agency RMBS. Importantly, the new standard gives more credit to deals with private MI. USMI submitted a letter on July 29 to Moody’s in response to request for comment by Moody’s on the new standard, which among other things commends Moody’s for many of the necessary updates provided in the proposed standard and asks for additional transparency around details about the benefits of MI, the proposed rejection rates, and Moody’s methodology for determining maximum insurance payout and allocation based on an insurer’s rating.

  • Urban Institute publishes article on risk reducing benefits of PMI. Urban Institute released a paper entitled, “Private Mortgage Insurance Reduces the Severity of Losses for Those Holding Risk,” that focuses on Moody’s recent proposed updates to its RMBS rating methodology, which will affect the ratings of bonds for the GSEs’ CRT deals and non-agency RMBS, and would give more credit to deals with MI. In the report, Urban notes, “given the increased focus on the topic, understanding the historical behavior of GSE loans with mortgage insurance is important. Examining Fannie Mae loans from 1999 through the first quarter of 2018, we conclude that PMI reduces the loss severity of loans with high loan-to-value (LTV) ratios by 19 to 24 percentage points—a very substantial reduction. So, it is important to recognize PMI’s contribution when developing measures assessing loan-level risk, giving proper “credit” in sizing capital requirements or assessing subordination levels for securitizations.”

  • Current Expected Credit Loss (CECL) accounting standard. Over the last couple of weeks, FASB has announced several proposed changes for the CECL accounting standard, including delaying the implementation deadline for private companies as well as small public companies (those with a market capitalization below $250 million and annual revenue of less than $100 million). If that proposal is enacted, the standard for those companies would not take effect until January 2023. CECL is a fundamental shift in how loss reserves are accounted for and incurred. Instead of waiting until losses are probable, institutions will forecast losses and establish reserves at the time of origination. The final rule was announced on June 16, 2016 and will impact any financial institution that holds loans on its balance sheet at amortized cost, such as banks, credit unions, and real estate investment trusts (REITs). Public companies filing with the Securities and Exchange Commission (SEC) will need to adopt CECL for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

    As noted by the Government Accountability Office (GAO), “CECL is considered by some to be the most significant accounting change in the banking industry in 40 years.” Banking regulators – the Federal Deposit Insurance Corporation (FDIC), Federal Reserve, and Office of the Comptroller of the Currency (OCC) – jointly issued a final rule on CECL’s implementation and have proposed changing the allowance for home and lease losses as a new defined term.

    Ahead of the implementation, and as lenders look to prepare as the implementation deadline approaches, USMI published a fact sheet on their website to provide information to lenders about the potential impact CECL may have on their books of business and how loan level credit enhancement, such as private MI, can help offset loss reserve requirements.

  • FHFA Director gives update on the Administration’s GSE plan. In March President Trump signed an Executive Order that directed federal agencies, most notably the Treasury Department and the Department of Housing and Urban Development, to provide both administrative and legislative solutions for modernizing the housing finance system and ending the conservatorships of the GSEs. Recently in an interview with Reuters, FHFA Director Mark Calabria said that he now expects the Administration will release reports developed by the Departments of Treasury and of Housing and Urban Development that outline the Administration’s plan for releasing Fannie Mae and Freddie Mac from conservatorship to be published at the end of August or early September

    Last fall, USMI released a white paper highlighting several areas of alignment around administrative reform that can be implemented in lieu of comprehensive legislative action by Congress. The specific recommendations proposed by USMI include reducing the duopolistic market power of the GSEs, increasing transparency, expanding private capital and reducing taxpayer risk, and promoting a strong regulator that establishes uniform standards and uses transparent processes to assess the GSEs activities and products.
  • USMI publishes new column on low down payment options. Earlier this month, USMI published a new column, “Buy a home without breaking the bank.” The column highlights the several solutions available to financial obstacles that may arise when buying a home, such as the 20 percent down payment. According to a recent report, 49 percent of non-homeowners stated that not having enough money for a down payment and closing costs was a major obstacle to purchasing a home. But data shows many aspiring homebuyers can afford to buy a home with less than 20 percent. Another survey found that among first-time homebuyers who obtained a mortgage, approximately 80 percent had down payments of less than 20 percent. The article links readers to LowDownPaymentFacts.com where consumers can learn about the number of different low down payment mortgage options available to them and how to become “home-ready.”

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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.

Letter: Response to Moody’s RFC

Posted on by dcadmin

Luisa De Gaetano Polverosi
Associate Managing Director
Moody’s Investor Service
7 World Trade Center
250 Greenwich Street
New York, NY 10007

Dear Ms. De Gaetano Polverosi:

U.S. Mortgage Insurers (USMI) welcomes the opportunity to provide comments on the “Proposed Update to Moody’s Approach to Rating US Prime RMBS”. Our members are supportive of the proposed update to Moody’s methodology, and view this update as a necessary step toward examining and updating various models, and also as a step toward prudently revitalizing the private securitization market for Residential Mortgage-Backed Securities (RMBS). We applaud the recognition that the value of private mortgage insurance (MI) extends beyond the government-sponsored enterprise (GSE) segment of the housing finance system and we believe that RMBS investors can greatly benefit from the loss severity reduction resulting from MI.

Of particular interest to our members is the proposed update to the evaluation of private MI. Lenders originating mortgages with loan-to-value (LTV) ratios above 80% typically obtain MI to maintain maximum flexibility for secondary market execution. Currently, however, the lack of credit for MI in the rating determination provides little incentive for these mortgages to be included in RMBS structures and transactions. The proposed changes to the methodology address this issue and lenders will no longer be disincentivized to direct mortgages with LTVs above 80% to the RMBS market, thus increasing access to liquidity in support of homeownership and offering investors more choices with regard to taking credit risk in this vital segment of the mortgage market.

Our members appreciate that the proposed update to Moody’s methodology has been the result of an investment of considerable time and effort in data analysis, as well as careful attention to the development of the mortgage lending landscape. While the proposal as published is an improvement, in the spirit of mutually beneficial ongoing dialogue, we would like to offer some commentary on the proposed methodology. Generally speaking, we feel that additional transparency, particularly more details around the benefits of MI, the proposed changes to rejection rates, and Moody’s methodology of determining maximum insurance payout and allocation based on the insurer’s rating, would be highly beneficial to market participants and enable more detailed analysis of the proposal, in addition to some minor recommended adjustments.

Rejection Rate Assumptions

Looking at the proposed rejection rates, a more detailed representation of the slope and/or shape of the line between the Baseline Assumption and Aaa Assumption would be useful, as well as more details surrounding the Aaa Assumption’s rejection rate range of 5-15% in the absence of a GSE backstop. In additional, the variability of the Aaa Assumption should include disclosures of all the factors that can drive a final determination.

We would also encourage the rejection rate assumptions to reflect MIs’ updated Master Policies which increased clarity on terms and streamlined the payment of claims to ensure that MI coverage results in timely, consistent, and accurate policy and claim administration. The proposed update’s rejection rate assumptions should account for the imbedded Rescission Relief (contractual circumstances under which an MI waives it rights to rescind coverage on a mortgage) applicable to the loans in a specific transaction. Mortgages that are already subject to Rescission Relief should have lower assumed rejection rates, and the various milestones regarding Rescission Relief should also be considered in the overall lifetime projections. Our member companies are more than willing to provide detailed information on Rescission Relief to Moody’s to assist with the refinement of implementation of the rejection rate assumptions.

Further, the proposed update to the rating methodology should reflect overall improvements in mortgage originators’ underwriting standards, as well as the MI industry’s new capital framework that is driven by the GSEs’ Private Mortgage Insurer Eligibility Requirements (PMIERs). All MI companies comply with PMIERs’ stringent capital and operational requirements and the industry has nearly doubled its pre-crisis capital, an indication of the industry’s strength and that MI on loans included in securitizations should improve credit enhancement levels in rated RMBS transactions.

The rejection rate haircut should also reflect the Representations & Warranties of a particular transaction and encourage stronger language by providing a benefit to RMBS issuers that provide investors with an extra layer of protection. There have been significant improvements to lenders’ underwriting practices, including the use of independent validation sources, over the last several years that would serve to reduce the overall rejection rates and improve credit enhancement levels, and should therefore be considered for loans that will be repurchased due to loan manufacturing defects or where the trust will be made whole due to servicing defects. Lastly, with regards to the differential treatment of the GSE backstop, USMI encourages Moody’s to consider broadening that category to create a level playing field by including additional types of credit enhancement backstops from a variety of counterparties that would supplement private MI’s credit risk protection.

Maximum Insurance Payout and Allocation

The proposed update includes analysis of expected losses but currently lacks visibility into the benefit of MI as it relates to the Moody’s Individual Loan Analysis credit enhancement (MILAN CE) framework. We would like to request that Moody’s disclose detailed methodology regarding treatment of MI in the MILAN framework. In practice, it is critical that a RMBS issuer be able to quantify the benefit of MI with a certain insurer rating in each of the rating scenarios. Therefore, we believe the RMBS market will greatly benefit from Moody’s publishing the Idealized Expected Loss Table which demonstrates the conversion from non-rejected insured losses to idealized losses in correspondence to the insurance rating of MI in each loss scenario. Without seeing the Idealized Expected Loss Table, it is difficult to comment on this specific component of the proposed methodology update, but there are a couple of general comments related to this element of the rating methodology we would like to offer.

The first is that since the rating of private MIs depends on many factors beyond their capital adequacy, it is possible that purely using an overall company rating may be overly conservative. For examples, ratings of private MIs may not fully reflect the benefit of credit risk transfer programs the MI industry executes with global capital markets and reinsurers, which have transformed the MI business model from “buy-and-hold” to “buy-manage-distribute” and significantly strengthen MIs’ capital positions and claims paying ability during stress periods. While the insurer rating may be reflective as an overall measure of counterparty risk, the incorporation of non-claims payment factors means that items not related to the ability to pay all claims are taken into consideration. It would be very helpful to have access to MI rating sensitivity analysis, as well as loss scenarios that inform the proposed methodology updates.

The second comment is that we would like to understand how the maximum insurance payout (MIP) plateaus and how the state-based insurance regulatory framework has been reflected. Of the private MI companies that ceased writing new business during the financial crisis approximately a decade ago, their cash payouts currently range from approximately 75% to 100%, with the remainder being deferred payment obligations (DPO) – facts that support very high MIP assumptions.

Conclusion

Thank you again for the opportunity to comment on the “Proposed Update to Moody’s Approach to Rating US Prime RMBS.” Our members appreciate the data-driven analysis and proposed update, and look forward to continuing a mutually beneficial dialogue, including on the topic of recognition of the value of private MI. This important shift can help promote new interest in private label RMBS, as lenders will have increased secondary market execution flexibility when it comes to their insured mortgage production. By providing an avenue for mortgages with private MI to contribute to the supply of collateral for RMBS, we will see improved liquidity for lenders and an expansion of mortgage credit investment opportunities for private capital investors.

Questions or requests for additional information may be directed to Lindsey Johnson, President of USMI, at ljohnson@usmi.org or 202-280-1820.

Sincerely,

Lindsey D. Johnson
President
U.S. Mortgage Insurers

 

Blog: MI Industry’s Observations & Recommendations for Replacing CFPB’s QM Patch

Posted on by dcadmin

The Consumer Financial Protection Bureau (CFPB) just released an Advanced Notice of Proposed Rulemaking on the “Qualified Mortgage Definition under the Truth in Lending Act.” The CFPB is considering whether to revise the Qualified Mortgage (QM) definition in light of the pending expiration of the provision commonly referred to as the GSE Patch (or Temporary GSE QM loan category) in January 2021. The same statutory product restrictions exist for loans under the Patch as for other QM loans, however these loans are not subject to the 43 percent debt-to-income (DTI) limit—a significant exception that has supported a substantial portion of the overall housing market. Considering a robust market has developed under the GSE Patch, any changes could substantially impact consumers’ access to mortgage finance as well as determine the level of risk within the mortgage finance system, which has implications for homeowners, financial institutions, and taxpayers.

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 the need to ensure there is a clear and transparent standard that maintains access to affordable and sustainable mortgage finance credit for home-ready borrowers. As different stakeholders contemplate what to do next with the Patch, USMI offers a few observations and recommendations for replacing the QM Patch.

Observations 

DTI is not the best or most predictive factor in assessing consumers’ ability-to-repay. Pre-financial crisis, one of the most egregious lending practices was making loans to individuals without a reasonable consideration of their financial ability-to-repay (ATR) the loan. As policymakers and regulators aimed to ensure consumers had at least some reasonable ATR their mortgages going forward, the 43 percent DTI cap was established as part of the CFPB’s QM rule. While DTI is not necessarily the most predictive measure, historical data (especially for 2004-2007 cohorts of loans) demonstrates that higher DTIs are correlated to higher defaults (and predictive of a consumer’s ATR).[i] Yet, DTI is only one measure.

USMI and others have identified more predictive borrower characteristics, most notably that reserves in a bank account are more indicative of an individual’s ATR than many other factors. According to a recent report by JPMorgan Chase Institute,[ii] when a borrower has three months of reserves (funds to cover mortgage payments) in the bank, these borrowers were five times less likely to default on their mortgage as those who had insufficient cash in the bank to cover one mortgage payment. According to the JPMorgan Chase Institute report, homeowners who had less than one month’s mortgage payment in savings made up 20 percent of the people in their survey but made up 54 percent of the people in the survey who defaulted on their loans.

While DTI is one factor for assessing ATR, by simply limiting the market to a hard 43 percent limit, many home-ready borrowers will be cut out of the market. In fact, roughly 30 percent of the GSEs’ market today is above the 43 percent DTI limit. CoreLogic estimates that the total loan origination volume for 2018 for loans that were above the 43 percent limit was roughly $260 billion out of a $1.6 trillion market in 2018[iii] (though this number could be higher because some banks have chosen to hold loans in their portfolio that are above the 43 percent DTI limit).

The need for transparency and input on compensating factors. Since the implementation of the QM Rule and the GSE Patch, the market has seen that many good quality loans have been above the 43 percent DTI limit. For loans with higher DTI under the Patch, the market has adapted and relied on compensating factors to adjust for and mitigate the additional risk. These compensating factors are done as part of the GSEs’ automated underwriting systems (AUSs). The current AUSs and the compensating factors used within them are not transparent to stakeholders or the public. However, as mortgage insurers and others analyze GSE loans with higher DTIs, we can begin to back-in to what the compensating factors are and when they come into play for higher DTI GSE loans.

Recommendations

ATR and product restrictions should remain as part of any updates to the QM rule. USMI believes the requirements for assessing a borrower’s ATR that require the lender to underwrite the consumer using credit, income and asset documentation should remain as critical components to any enhancements to the rule. It is also essential that the QM statutory product restrictions remain intact to maintain discipline in the lending community as well as to protect consumers.

A single, transparent underwriting standard for defining QM criteria should be established. USMI recommends a list of transparent mitigating underwriting criteria (compensating factors) for loans with DTIs between 45 and 50 percent for defining QM (in addition to the existing statutorily defined product features and ATR underwriting criteria) be established. While USMI has developed a list of proposed criteria (see below), the list of criteria could ultimately be set by a non-profit membership organization or standard-setting body.

A transparent and easy-to-understand and use set of underwriting criteria can be programmed to allow for manual underwriting or automatic underwriting engines. Further, any private market participant could publish or code these criteria in their investor requirements. For the GSEs, it would remain in the purview of the Federal Housing Finance Agency (FHFA) Director to determine whether the GSEs could guarantee high DTI loans. If not, the loans would simply receive an “Approve/Ineligible” or “Accept/Ineligible” AUS decision. This approach would level the playing field between market participants, allow for continued innovation around documentation, verification, and other underwriting standards, and force the GSEs’ AUSs to become more transparent.

Proposed Set of Compensating Factors

Importantly, USMI believes that there should be one industry standard with complete transparency into the credit decisioning factors used for underwriting mortgage credit risk and that input from industry should be allowed on updates to the underwriting criteria. Further, any changes related to maximum DTIs should be consistent across different lending channels (e.g., FHA and GSEs) to ensure there is not market arbitrage to achieve QM status.

Appendix Q needs to be addressed. All proposals to assess and define an ATR will have challenges or shortcomings. For any proposal that includes DTI, there is still the challenge of addressing the acknowledged limitations of Appendix Q, including to allow lenders to document and verify borrower income and assets utilizing new innovations in the industry. A possible permanent fix to address Appendix Q could be to allow for the GSEs’ guides to be maintained by a regulatory body outside of the GSEs and updated as necessary. Legislation is needed if Appendix Q is to allow for the use of guides or handbooks of the GSEs or other agencies.

APOR could remain the determinant for the Safe Harbor protection but should not be the replacement for DTI requirement and Underwriting Criteria. Further, to provide a more level playing field between the Federal Housing Administration (FHA) and the conventional market, the annual percentage rate (APR) cap of Average Prime Offer Rate (APOR) + 150 bps needs to be increased to account for GSE LLPAs and private mortgage insurance. Setting the cap for QM Safe Harbor protection at 200 bps over APOR + 200 bps will limit the shift of riskier, high-LTV business to FHA, preserve greater private capital participation in the pricing of risk, and promote better taxpayer protection.

[i] https://www.fhfa.gov/PolicyProgramsResearch/Research/Pages/wp1902.aspx

[ii] JPMorgan Chase Institute: Trading Equity for Liquidity: Bank Data on the Relationship Between Liquidity and Mortgage Default. June 2019.

[iii] https://www.corelogic.com/blog/2019/07/expiration-of-the-cfpbs-qualified-mortgage-gse-patch-part-1.aspx

Blog: Buy a Home Without Breaking the Bank

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Buying a home is one of life’s biggest financial milestones, but people often think it’s out of reach because of the costs involved, including the myth that you have to put 20% down. The fact is, you don’t necessarily need to deplete all of your savings to qualify for a mortgage and you can purchase a home sooner than many people believe.

You aren’t alone in thinking you can’t afford a home right now. According to a recent report, 49% of non-homeowners stated that not having enough money for a down payment and closing costs was a major obstacle to purchasing a home. But when you look at the data, many aspiring homebuyers can afford to buy a home with less than 20%. In fact, another recent survey found that among first-time homebuyers who obtained a mortgage, approximately 80% had down payments of less than 20%.

There are several low down payment mortgage options available to you, such as conventional loans with private mortgage insurance (MI) or government-backed loans like those insured by the Federal Housing Administration (FHA).

For example, a qualified borrower can get a conventional loan with private MI for as little as 3% down. If he or she waited to save for a 20% down payment, it could take up to 20 years to save that amount, plus closing costs, for a $262,250 house — the national median sales price in 2018 according to the National Association of REALTORS®.  That wait time is trimmed down to seven years when buying a home with a 5% down, where the loan is sustainably backed by private MI.  Purchasing a home with less down using private MI can also help ensure you continue to have prudent savings, and can free up funds that you can use for other important home purchases – such as renovations, appliances, and furniture.

There are other mortgage options available to you as well, such as government-backed FHA loans that allow you to put down as little as 3.5%. However, unlike private MI, which can be canceled once you reach 20% equity in your home, the mortgage insurance premiums attached to FHA loans typically can’t be canceled and remain throughout the life of the loan.

It’s important to know what home loan option is best for you, and you should speak with a mortgage lender to help inform your decision. The bottom line, however, is that there are affordable low down payment home loan options out there, which could mean the difference between getting into your home sooner, allowing you to build wealth through home equity, or waiting for years while renting. By taking advantage of home loans backed by private MI, you can spend less time worrying about a down payment and more time enjoying your new home.

Getting into your new home with private MI and keeping more of your hard-earned money in the bank can be a very smart way to invest in your future. Check out www.LowDownPaymentFacts.com to learn more.

Statement: President Trump’s Executive Order on Housing Affordability

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WASHINGTON — Lindsey Johnson, President of U.S. Mortgage Insurers (USMI), today issued the following statement on President Trump’s Executive Order on Establishing a White House Council on Eliminating Regulatory Barriers to Affordable Housing:

“We welcome the Trump Administration’s executive order on housing affordability because it recognizes the significant challenges that exist for many first time and repeat borrowers with finding affordable homes and seeks tangible steps to address the underlying issues. To support sustainable homeownership growth, home-ready borrowers need access to prudent, affordable mortgage credit while also ensuring the private sector, and not taxpayers, are on the hook for mortgage credit risk. The private mortgage insurance industry’s business is focused on facilitating sustainable mortgage finance credit to home-ready borrowers who do not have large down payments—helping more than one million individuals in 2018 attain homeownership sooner than they otherwise could—all the while shielding taxpayers from mortgage credit risk. USMI looks forward to continuing to work with the Administration and other stakeholders to find effective ways for homebuyers to gain access to prudent and affordable mortgages.”

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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.

Newsletter: June 2019

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Washington is buzzing with activity on the housing finance front, both in market developments and policy discussions as FHFA Director Calabria continues to outline his plans for Fannie Mae and Freddie Mac (“the GSEs”).
 
Also, June is National Homeownership Month! On June 5, USMI released a new report on how private mortgage insurance (MI) helps borrowers get into homes sooner. Brad Shuster, USMI Chairman and Executive Chairman of the Board of NMI Holdings, Inc., penned an op-ed in The Hill highlighting some key points from the report. In addition, the Federal Housing Finance Agency (FHFA) finalized their Single Security Initiative to create a common single-family securities program for the GSEs after the launch of the Uniform Mortgage-Backed Security (UMBS). Fannie Mae published the results of a nationally representative survey that revealed most consumers overestimate the requirements to get a mortgage. Lastly, the Senate confirmed two key positions for the U.S. Department of Housing and Urban Development (HUD) and the Senate Banking Committee scheduled a hearing entitled “Should Fannie Mae and Freddie Mac be Designated as Systemically Important Financial Institutions (SIFIs)?”

  • USMI releases state-by-state report on role of private MI. USMI released its second annual report on the role of private MI facilitating low down payment lending in all 50 states and the District of Columbia. The report found more than 30 million homeowners have been served by MI since 1957, including more than one million people in 2018 alone, and breaks down on a state-by-state basis, low down payment mortgage lending with private MI. It also provides an analysis of how long it would take those borrowers to save for a 20 percent versus a five percent down payment. The report finds that the top five states for the number of borrowers helped by private MI in 2018 were Texas, Florida, California, Illinois, and Ohio. The complete report on MI in the U.S. is available here.
  • Brad Shuster, USMI Chairman and Executive Chairman of the Board of NMI Holdings, Inc, penned an op-ed in The Hill. Shuster celebrated National Homeownership Month with an op-ed in The Hill that highlights the national conversation about how to best reform the U.S. housing finance system to sustain and grow homeownership in a safe and affordable way. Importantly, Shuster highlights the very important role that private MI plays in ensuring home-ready borrowers have access to sustainable low-down payment lending. Mr. Shuster notes that the recently released USMI state-by-state report, “showcases how private MI helps hard-working, home-ready families access the conventional mortgage market, even when they don’t have a large down payment.”

    Shuster also notes the importance for policymakers to understand the “long, time-tested role MI has played as they seek to create a more robust housing finance system. Private MI serves as protection against mortgage credit risk if a borrower defaults on their mortgage.”
  • FHFA sends Annual Report to Congress and Director Calabria calls for legislative reforms. Last week, FHFA sent its Annual Report to Congress, which included Director Calabria’s legislative recommendations for housing finance reform. In the FHFA 2018 Report to Congress, FHFA reported on a number of activities executed over the last year by the GSEs. While the report was drafted (and likely finalized) prior to Director Calabria’s confirmation (FHFA is required to submit the report each year before June 15), the Director wrote an opening letter to Chairman Mike Crapo (R-ID) and Ranking Member Sherrod Brown (D-OH) to reiterate his priorities for the GSEs. Director Calabria underscored the need for reform, stressing that taxpayers remain exposed to undue mortgage credit risk and to urge Congress to enact legislation.

    In the letter, Director Calabria outlined specific recommendations for legislative reforms, including a request for Congress to give him authority to grant new charters to increase competition against the GSEs’ “duopoly” suggesting, “[t]o promote competition, Congress should authorize additional competitors and provide FHFA chartering authority similar to that of the Office of the Comptroller of the Currency.” He also called for Congress to grant FHFA additional authority to provide oversight of counterparties and suggested that FHFA should have greater discretion over the GSEs’ regulatory capital. While Director Calabria has noted in public speeches that only Congress has the authority to provide for an explicit government guaranty, he did not specifically call for Congress to establish an explicit government guaranty in his letter.
  • The GSEs complete their Single Security Initiative and launch UMBS. Earlier this month, Fannie Mae and Freddie Mac officially moved to issue the Uniform Mortgage-Backed Security (UMBS). According to HousingWire, the UMBS is a common security through which the GSEs will finance qualifying fixed-rate mortgage loans backed by one- to four-unit single-family properties. Previously, the GSEs only issued securities through their own programs/platforms, which meant an inevitable disparity and inconsistencies existed between the two. Fannie Mae’s program has historically been far more liquid than Freddie Mac’s, which created an imbalance between their trading volumes. Under the new initiative, FHFA will require Freddie Mac to remit homeowners’ mortgage payments to investors in 55 days rather than 45, which is consistent with Fannie Mae’s guidelines.

    Following the launch, Renee Schultz, Senior Vice President of Capital Markets at Fannie Mae, released a statement calling the launch “a major milestone that marks the successful implementation of the Single Security Initiative.” FHFA Deputy Director Robert Fishman stated, “[b]y addressing structural issues and trading disparities, the UMBS will benefit taxpayers and the nation’s housing finance system.”
  • Fannie Mae consumer survey finds knowledge gap to obtain a mortgage. On June 5, Fannie Mae published the results of a survey of 3,647 Americans which found that most consumers vastly overestimate the requirements to obtain a mortgage. “The lack of mortgage qualification understanding is pervasive, even among current homeowners, those who say they are actively planning to purchase a home in the next three years, and those who successfully answered questions testing general financial literacy,” the researchers wrote. For example, when asked how much money a borrower is required to put down, 40% said they didn’t know. Of those who did have an idea, they cited 10% as a required minimum.  
  • Senate Banking Focuses on the GSEs as SIFIs. The Senate Banking Committee has scheduled a hearing entitled “Should Fannie Mae and Freddie Mac be Designated as Systemically Important Financial Institutions?” The hearing is timely given FHFA Director Calabria has repeatedly said “the path out of conservatorships that we will establish for Fannie and Freddie is not going to be calendar dependent. It will be driven, first and foremost, by their ability to raise capital.” It also comes as policymakers and stakeholders wait for FHFA action following the agency’s Notice of Proposed Rulemaking on the Enterprise Capital Framework that was released last summer and for which the comment period closed in November 2018. USMI submitted a comment letter, which can be found here.
  • Senate confirms HUD nominees. Finally, yesterday, the Senate voted to confirm two HUD nominees: Seth Appleton to be the Assistant Secretary for Policy Development and Research; and Robert Hunter Kurtz to the be the Assistant Secretary for Public and Indian Housing.

Letter: Comments on FHFA’s Proposed Rule on Enterprise Capital Requirements

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A Comment Letter from U.S. Mortgage Insurers

Alfred M. Pollard
General Counsel
Federal Housing Finance Agency
Eighth Floor
400 Seventh Street, SW
Washington, D.C. 20219


RE: Comments/RIN 2590-AA95


Dear Mr. Pollard:

This letter is submitted by U.S. Mortgage Insurers (USMI), a trade association comprised of the leading private mortgage insurance (MI) companies in the United States.0F1 Together, the private mortgage insurance industry has helped nearly 30 million homeowners over the past 60 years, including more than 1 million in the past year alone.

USMI is dedicated to a housing finance system backed by private capital that enables access to housing finance for all creditworthy borrowers while protecting taxpayers. USMI supports meaningful and appropriate capital requirements for Fannie Mae and Freddie Mac (the “Enterprises”) and appreciates the Federal Housing Finance Agency (FHFA) for initiating this rulemaking process, and for affording us an opportunity to submit comments.

Currently, the Enterprises use a FHFA-developed Conservatorship Capital Framework (CCF) to align business and pricing decisions (e.g. G-Fees) with economic risk. The notice of proposed rulemaking (NPR) states that during conservatorship, FHFA expects the Enterprises to “use assumptions about capital described in the rule’s risk-based capital requirements in making pricing and other business decisions,” even though the new standards will not be used to determine capital compliance until after the conservatorship ends.1F2 Therefore, the final regulation could have an immediate real-world impact on the Enterprises’ activities and the cost and availability of mortgage credit. As a result, this rulemaking is very significant for our members, other participants in housing finance, and the American public.

USMI’s full comments to FHFA can be found here.