Category: Blog

Statement: Confirmation of Deputy HUD Secretary Pam Patenaude

Posted on by Rhina Portillo

WASHINGTON — Lindsey Johnson, President and Executive Director of the U.S. Mortgage Insurers (USMI), today issued the following statement on the confirmation of Pam Patenaude to be Deputy Secretary of the Department of Housing and Urban Development (HUD):

“USMI applauds the Senate for its confirmation of Pam Patenaude to be Deputy Secretary of HUD. As a longtime public servant and expert in the housing finance system, Deputy Secretary Patenaude fully understands the need for a coordinated, consistent, and transparent approach to federal housing policy across government channels.

“Deputy Secretary Patenaude’s extensive background in housing finance will allow her to immediately begin work on the most important issues facing the housing finance system. Importantly, Deputy Secretary Patenaude’s leadership in these efforts will ensure that Americans have greater access to mortgage finance credit, promote a greater role for increased private capital in mortgage finance, and reduce taxpayer risk exposure. USMI and the private mortgage insurance industry look forward to working with Deputy Secretary Patenaude going forward to establish a more equitable and robust housing finance system.”

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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.

Blog: How to lower your monthly mortgage payment

Posted on by Rhina Portillo

Owning your own home comes with many advantages, including escaping rising rents and the personal and financial stability associated with homeownership. Fortunately, millions of Americans, with less than 20 percent down, have been able to buy a home sooner thanks to mortgage insurance (MI). If you don’t put down 20 percent of the mortgage cost, you will likely be required to purchase MI, which enables low-down-payment borrowers to qualify for home financing from lenders.

While homeownership has many benefits and continues to be part of the American Dream, it is not without costs. Several surveys have found that the majority of first-time homebuyers — over 80 percent according to one study — put less than 20 percent down. For these borrowers, there is usually the added expense of MI, which may give some of these borrowers pause.

But there is good news: the monthly private mortgage insurance premiums do not last forever on most conventional loans. And when private MI (PMI) cancels, homeowners will have more cash in their pockets each month — money that is available for home improvements or other goals. It is important to understand, however, that not all MI is the same, and not all MI can be canceled.

There are numerous low-down-payment mortgage options available that include MI. The two most common are: (1) home loans backed 100 percent by the government through the Federal Housing Administration (FHA) that include both an upfront and annual mortgage insurance premium (MIP); and (2) conventional loans, which are typically backed at least in part by private sources of capital, such as private MI. The key difference is that one form can be canceled (PMI) while the other (FHA) typically cannot be canceled.

An FHA loan can be obtained with a down payment as low as 3.5 percent. However, be aware that you will typically have to pay a mortgage insurance premium (MIP) of 1.75 percent of the total loan amount at closing or have it financed into the mortgage. In addition to your regular monthly mortgage payments on your FHA loan, you will also pay a fixed monthly MIP fee for the life of the loan. This means you could pay hundreds of dollars extra every month — thousands over the life of the loan — until you pay off the entirety of the loan.

If you obtain a conventional loan with PMI, you can put as little as 3 percent down. Like an FHA loan, PMI fees are generally factored into your monthly mortgage payment. However, PMI can often be canceled once you have established 20 percent equity in the home and/or the principal balance of the mortgage is scheduled to reach 78 percent of the home’s original value. This means that the rest of your mortgage payments will not include any extra fees, so that your payments go down in time, saving you money each month. What you save in the long run can then be put toward expenses like home renovations, which can further increase your home’s value.

MI is a good thing because it bridges the divide between a low down payment and mortgage approval. But not all MI is created equal. If you want to buy a home but still save in the long run, PMI might be the right option for you. Check out lowdownpaymentfacts.org to learn more.

Report: Urban Institute Report Highlights Role Private Mortgage Insurers Have Played to Protect Taxpayers, Expand Access to Homeownership for 60 Years

Posted on by Rhina Portillo

For 60 years, private mortgage insurance (MI) has helped more than 25 million families become successful homeowners. To commemorate this milestone, the Urban Institute examined the industry’s history and the positive role MI has served for homebuyers and the mortgage finance system overall. Urban notes in its study, “[p]rivate mortgage insurers have played a crucial role over the past six decades enabling first-time homebuyers to gain access to high-[loan-to-value] conventional financing while reducing losses for the GSEs.” The report confirms that the presence of private mortgage insurance makes it easier for creditworthy borrowers with limited down payments to access conventional mortgage credit. This is the primary function of MI – to help borrowers qualify for home financing.

The report also focuses on the role MI plays to reduce taxpayers’ exposure to mortgage credit risk. MI insures the first-loss credit risk to the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, helping to reduce GSE losses, and therefore taxpayers’ losses, on defaulted mortgages. And historical experience and data show MI works. Urban found that GSE loans with MI consistently have lower loss severities than those without MI. In fact, for nearly 20 years, loans with MI have exhibited lower loss severity each origination year. The Urban analysis shows that “for 30-year fixed rate, full documentation, fully amortizing mortgages, the loss severity of loans with PMI is 40 percent lower than [loans] without.”

Loss Severity for GSE Loans with and without PMI, by Origination Year Groupings

Sources: Fannie Mae, Freddie Mac, and the Urban Institute.

Note: GSE = government-sponsored enterprise; PMI = private mortgage insurance. The GSE credit data are limited to 30-year fixed-rate, full documentation, fully amortizing mortgage loans. Adjustable-rate mortgages and Relief Refinance Mortgages are not included. Fannie Mae data include loans originated from the first quarter of 1999 (Q1 1999) to Q4 2015, with performance information on these loans through Q3 2016. Freddie Mac data include loans originated from Q1 1999 to Q3 2015, with performance information on these loans through Q1 2016.

 

This data, coupled with the more than $50 billion in claims our industry paid since the GSEs entered conservatorship—which represents over 97% of valid claims paid, underscores how MI provides significant first-loss protection for the government and taxpayers. By design, MI provides protection before the risk even reaches the GSEs’ balance sheets. As the government explores ways to further reduce mortgage credit risk while also ensuring Americans continue to have access to affordable home financing, the data shows private MI is an important solution.

The MI industry, like nearly all other industries in financial services, was tested like never before through the financial crisis. Urban’s report acknowledges the challenges the industry has overcome from the financial crisis and the opportunities ahead for the industry. Coming out of the crisis, the MI industry is even stronger with more robust underwriting standards, stronger capital positions, and improved risk management. Additionally, in the last two years, private mortgage insurers have materially increased their claims paying ability in both good and bad economic times due to new higher capital standards under the Private Mortgage Insurance Eligibility Requirements (PMIERs).

Urban notes that the industry “should be more resilient going forward” because of the important changes applied to the industry today – including the enhanced capital, operational, and risk standards ‒ and highlights the broad agreement among parties studying GSE reform for the need to reduce the government’s footprint and increase the role of private capital. These developments have helped strengthen the industry and new reforms can allow MI to take on an even greater role to continue protecting taxpayers and expanding access to homeownership for the next 60 years and beyond.

Statement: March 2017 FHFA Credit Risk Transfer Progress Report and RFI

Posted on by Rhina Portillo

The following statement can be attributed to Lindsey Johnson, USMI president and executive director:

“Private mortgage insurance is a 60-year old bedrock of the housing system that for decades has helped low down payment borrowers qualify for mortgage financing—more than 25 million borrowers to date—and has provided critical credit risk protection to the government and taxpayers through numerous housing cycles. MI works and is a reliable form of credit risk protection, as evidenced by the more than $50 billion in claims that mortgage insurers paid to the GSEs through the downturn. As FHFA states in its progress report, private mortgage insurance remains the primary form of credit enhancement used on mortgages sold to the GSEs with loan-to-value ratios over 80 percent, and in the first quarter of 2017 MI covered $48 billion of mortgages the agencies purchased.

“In the absence of comprehensive GSE reform, FHFA is rightfully exploring options in the credit risk share market through various pilots, and USMI encourages greater balance, transparency, and comparable standards among these options. The cost of credit enhancement has more than doubled for many of the back-end CRT tranches sold, which indicates price volatility continues to be present for these transactions. Our industry remains confident that greater potential benefits can be realized through front-end risk sharing, specifically as outlined in our proposal last year to explore deeper MI coverage, where even more risk is transferred away from the government before it ever touches the GSEs’ balance sheets. The vast majority (more than 97 percent based on risk in force) of CRT transactions to date have been done on the back-end, with the GSEs warehousing credit risk before transferring to the private sector. The GSEs need not carry this level of risk considering there is ample opportunity to increase or at a minimum balance the level of front-end transactions.

“We also encourage equivalent counterparty standards for other CRT transactions, similar to the stringent requirements of mortgage insurers. Doing this will ensure taxpayers are better protected. In the last two years, MIs have materially increased their claims paying ability in both good and bad economic times due to new higher capital standards under the Private Mortgage Insurance Eligibility Requirements (PMIERs).  All MIs have met or exceeded PMIERs requirements as of December 31, 2015.”

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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 1027

Posted on by Rhina Portillo

Here is a roundup of recent news in the housing finance industry. USMI released a paper assessing housing finance reform proposals announced by housing institutions and organizations, the Senate Banking Committee held a hearing on housing finance reform, Genworth Financial introduced its first-ever First-Time Homebuyer Market Report, the Federal Housing Finance Agency (FHFA) submitted its 2016 annual report to Congress, and American Action Forum (AAF) commented on Fannie Mae and Freddie Mac’s (the GSEs) increasingly risky credit portfolios while calling for greater usage of private mortgage insurance (MI).

  • USMI Releases Policy Paper Assessing Housing Finance Reform Proposals. USMI released a paper that assesses a number of reform proposals for the housing finance system. This paper analyzes the various reform proposals put forth by widely respected institutions and organizations through the lens of USMI’s housing finance reform principles, with attention to the role of private capital to protect against taxpayer risk exposure in the proposed new systems. 
  • Senate Banking Committee Holds Hearing on Housing Finance Reform. Edward DeMarco (President, Housing Policy Council), Dave Stevens (President, Mortgage Bankers Association), and Michael Calhoun (President, Center for Responsible Lending) testified before the Senate Banking Committee on principles for housing finance reform and specific proposals, including the importance of more private capital standing in front of taxpayers’ risk exposure.
  • Genworth Introduces First-Time Homebuyer Market Report. Genworth introduced its First-Time Homebuyer Market Report – the first economic series focused on first-time homebuyer market size. The report provides data spanning two housing cycles over the past 24 years that will make the first-time homebuyer market more visible to housing industry participants and policymakers. A factsheet of the report can be found here.
  • FHFA Submits 2016 Annual Report to Congress. FHFA submitted its annual Report to Congress for 2016, which describes the actions undertaken by the agency to carry out its statutory responsibilities. The report summarizes the findings of FHFA’s 2016 examinations of the GSEs as well as FHFA’s actions as conservator of the GSEs during 2016. The report also describes FHFA’s regulatory guidance, research, and publications issued during the year. 
  • AAF Comments on GSEs’ Increasingly Risky Credit Transfers. In a post on its website, AAF commented on the current status of FHFA and the GSEs, which are retaining risky assets and transferring very little credit risk while remaining dangerously undercapitalized. AAF warns that FHFA and the GSEs’ actions will most likely lead to another taxpayer bailout of the entities. AAF notes that while GSE reform remains a top priority to fix the housing finance system, private MI can be more extensively used in credit risk transfer to de-risk the GSEs’ portfolios, which in turn will protect US taxpayers and the federal government.

Report: Assessing Proposals to Reform America’s Housing Finance System

Posted on by Lindsey Johnson

Nearly a decade after the financial crisis, the housing finance system remains largely structurally unreformed. There have been several legislative pushes for comprehensive reform after American taxpayers provided $187 billion in bailout assistance to Fannie Mae and Freddie Mac (the “GSEs”) and since both GSEs were placed into conservatorship in 2008, though all comprehensive reform efforts to date have failed to be enacted.

USMI firmly believes that reform is necessary to put our housing finance system on a more sustainable path so that creditworthy borrowers will have access to prudent and affordable mortgage credit in the future and so that taxpayers are better shielded from housing related credit risks. For more than 60 years, private mortgage insurance (MI) has played a critical role in providing access to mortgage credit and protecting taxpayers. The 115th Congress and the Trump Administration have a unique opportunity to address this last unfinished reform to truly put America’s housing finance system on a sustainable path. Recently, there have been a number of reform proposals from think tanks, trade associations, and others—each articulating a specific set of principles or visions for the structure of the new future housing finance system, and elements of the transition to a future state.

This paper, Assessing Proposals to Reform America’s Housing Finance System, seeks to analyze various proposals through the lens of USMI’s housing finance reform principles, with particular attention to the role of private capital to protect against taxpayer risk exposure in the proposed future systems. Several thoughtful legislative proposals for housing finance reform exist, but this paper is restricted to analysis of several of the white papers and reform proposals put forward by think tanks and trade associations. Simply returning to the pre-conservatorship status quo does nothing to strengthen the housing finance system, and USMI looks forward to working with industry and consumer groups, Congress, and the Administration to identify the best reforms to put America’s housing finance system on a sustainable path.

USMI appreciates the work the of authors and stakeholders who assembled these proposals, and we look forward to working with policymakers and other stakeholders to advance necessary reforms to enhance our housing finance system.

Download as PDF

Newsletter: June 2017

Posted on by dcadmin

Here is a roundup of recent news in the housing finance industry. The Trump administration released its 2018 federal budget proposal for the U.S. Department of Housing and Urban Development (HUD), Federal Housing Finance Agency (FHFA) Director Mel Watt and Treasury Secretary Steven Mnuchin testified before the U.S. Senate on potential GSE reform, USMI and numerous other housing industry groups voiced their support for the nomination of Pam Patenaude to serve as Deputy Secretary of HUD, and several third party groups released white papers on access to affordable mortgage credit and housing finance reform.

  • Trump Administration Releases 2018 Federal Budget Proposal for HUD. The Trump administration released its 2018 federal budget proposal for HUD, which includes $6.2 billion – or 13.2 percent – in cuts to the agency. The cuts would be implemented through rental assistance reforms, the elimination of funding for certain programs, and through the streamlining of internal operations. The budget includes $160 million for the Federal Housing Administration (FHA) to improve risk management and program support processes, and would also provide $30 million towards modernizing the FHA’s system and updating its programming language.
  • FHFA Director Watt Calls for GSE Reform. In testimony before the Senate Committee on Banking, Housing and Urban Affairs, FHFA Director Mel Watt called for Fannie Mae and Freddie Mac (the “GSEs”) to be taken out of government conservatorship as soon as possible. Watt warned of future potential GSE draws on the line of credit at Treasury as the GSEs currently have a very limited capital buffer and are scheduled to go to zero capital in 2018. Watt expressly noted that Congress should be responsible for achieving housing finance reform, not the FHFA.
  • Treasury Secretary Mnuchin Testifies in Senate. Treasury Secretary Steven Mnuchin testified before the Senate Committee on Banking, Housing and Urban Affairs where he too was questioned on the topic of housing finance reform. Mnuchin said that GSE reform would be a priority in the second half of the year for the Trump administration and noted that he and the administration would work with Congress on reform efforts. Notably, Mnuchin stated that he expects the GSEs to continue to pay dividends to the Treasury Department despite statements made the previous week by FHFA Director Watt, who said he might allow the GSEs to retain profits in order to build capital buffers against potential future losses.
  • Housing Industry Groups Support Pam Patenaude’s Nomination to HUD. Numerous housing industry associations expressed their support for the Trump administration’s nomination of Pam Patenaude as Deputy Secretary of HUD, including Mortgage Bankers Association (MBA), National Association of Realtors (NAR), National Association of Home Builders (NAHB), and National Fair Housing Alliance (NFHA), among others. In a letter provided to Senate Banking Committee members last week, USMI similarly voiced its support for Patenaude’s nomination. USMI’s Chairman Patrick Sinks, President and CEO of MGIC, said of the nomination:“USMI encourages members of the Senate Banking Committee to approve Mrs. Patenaude’s nomination and to move it expeditiously to the Senate floor… Mrs. Patenaude understands the housing finance system and the need for a coordinated, consistent and transparent approach to federal housing policy across government channels. Her leadership on these important issues will ensure that Americans have greater access to mortgage finance credit for borrowers, while at the same time, increasing private capital in mortgage finance and reducing taxpayer risk exposure.”
  • New GSE Reform Proposals Released by Third Party Groups. In the last week, several organizations interested in GSE matters released white papers on housing finance reform for policymakers and industry stakeholders to consider. These groups include the Bipartisan Policy Center, the Milken Institute, and Moelis & Co. LLC.

Blog: A smarter way to buy a home

Posted on by dcadmin

Are you considering buying a home? With mortgage rates on the slow and steady incline, there may be no better time for a home purchase than now. Mortgage interest rates will likely continue to go up for the foreseeable future, according to recent data from the housing finance company Freddie Mac. Many housing experts and industry observers agree.

What does this mean?

If you are thinking about buying a home, it means don’t wait any longer. The overall cost of buying a home in the future will only increase compared to buying a home of the same value today. Furthermore, rising interest rates impact housing inventory, as sellers might not be as interested in moving if it means paying a higher rate on a new mortgage. As a result, the dream home you see today might not be available next year.

The 20 percent down myth

If you’ve put off buying your next home to save for the full 20 percent there is good news: you don’t need it. If you were unaware of this, you’re not alone. A recent survey found that among first-time homebuyers who obtained a mortgage, 80 percent made a down payment of less than 20 percent. While there are several low down payment mortgage options available, only one has a 60-year history of being a steadfast, smart way to get into a home: a conventional loan with private mortgage insurance (MI).

What is a conventional loan with MI?

A conventional loan is a mortgage from a lender that is not completely backed by the federal government. For qualified borrowers with a low down payment, private MI is required and typically paid monthly along with the mortgage payment. You can obtain this type of loan with as little as 3 percent down, though buying with a 5 percent down payment will result in a lower monthly payment.

There are other types of low down payment options that also include MI, such as the government-insured loans backed by the Federal Housing Administration (FHA). Unlike the premiums charged by FHA loans, private MI premiums can be cancelled once 20 percent equity in home value is reached, and with private MI there are no upfront costs added onto a borrower’s initial down payment like there are with an FHA loan. This means your monthly bill decreases and you have extra money to spend on your family, vacations, retirement and any other needs.

Don’t sit on the sidelines and miss out on your dream home. To learn more about mortgage insurance compared to other low down payment options, visit LowDownPaymentFacts.org.

Newsletter: April 2017

Posted on by Rhina Portillo

Here is a roundup of recent news in the housing finance industry. USMI’s Lindsey Johnson interviews USMI Board Chairman Patrick Sinks on the 60th anniversary of the private mortgage insurance (MI) industry. Additionally, a recent congressional bill aimed at promoting greater transparency at Fannie Mae and Freddie Mac (the GSEs) was passed by the House of Representatives, President Trump announced his nomination for Deputy Secretary of the Department of Housing and Urban Development (HUD), and the Mortgage Bankers Association (MBA) released a new report on reform recommendations for the GSEs and housing finance system.

  • Private Mortgage Insurance Industry Turns 60. This week, USMI published a Q&A between USMI President and Executive Director Lindsey Johnson and USMI Chairman and Mortgage Guaranty Insurance Corp. (MGIC) CEO Patrick Sinks. In their discussion, Johnson and Sinks discuss the past, present, and future of the MI industry, and how MI has helped people affordably become homeowners for 60 years.
  • House Bill Aims to Open GSE Records to FOIA. This week, the House of Representatives passed H.R. 1694, the Fannie and Freddie Open Records Act of 2017, by a unanimous vote. H.R. 1694, introduced by Rep. Jason Chaffetz (R-UT), would mandate Fannie Mae and Freddie Mac to accept and process Freedom of Information Act (FOIA) requests from the public, and release information to satisfy FOIA requests as long as they remain under federal conservatorship.
  • President Trump Announces Deputy Secretary of HUD Nomination. Today, President Trump announced the nomination of Pamela Patenaude to be Deputy Secretary of HUD. Patenaude is currently the President of the J. Ronald Terwilliger Foundation for America’s Families and previously served as Director of the Bipartisan Policy Center Housing Commission. USMI issued the following statement on Patenaude’s nomination:“Pam Patenaude is a strong choice to serve as Deputy Secretary for HUD. Throughout her career, she has been a proven leader on housing issues and will bring a wealth of knowledge and experience to the agency. USMI looks forward to working with Pam on the important issues facing the housing finance industry.”
  • MBA Releases New Report on Reform Recommendations for GSEs and Housing Finance System. This week, MBA released a report outlining its recommendations to reform the GSEs and the housing finance system. The report covers many areas such as the value of loan-level credit enhancement and the benefit of private MI, as well as promotes greater use of front-end credit risk sharing including through private MI. The report also recognizes the important functions of private market participants and reinforces that there should be a bright line between the functions of private market participants in the primary market and those of secondary market participants. In a statement on the report,  USMI President Lindsey Johnson said:“USMI is pleased to see MBA and other industry, trade and consumer groups provide ideas and proposals for how to reform the housing finance system and we look forward to continuing to work with MBA and others to promote reforms to the housing finance system to put more private capital in front of taxpayer risk and to create a more sustainable housing finance system that works for market participants, taxpayers and consumers. For 60 years, MI has provided effective credit risk protection for our nation’s mortgage finance system. This time-tested form of private capital should be the preferred method of absorbing credit loss in front of any government guaranty, helping to minimize taxpayer risk while ensuring mortgage credit remains accessible.”

Blog: Private Mortgage Insurance at 60 Years — Lindsey Johnson interviews USMI Board Chairman Pat Sinks

Posted on by Lindsey Johnson

By Lindsey Johnson

What was the driving force in 1957 that led to the inception of private mortgage insurance (MI)?

While the late 1950s was a time of great economic prosperity, the devastating effects of the Great Depression and World War II still impacted how financial institutions viewed risk. These institutions were leery of issuing mortgages with less than 20 or 25 percent down, unless the Federal Housing Administration (FHA) insured them. However, the red tape, expense, and regulations involved in working with the FHA made it impractical for many banks to lend and served as a barrier to homeownership for many low- to moderate-income borrowers. As a result of the precarious mortgage lending situation, a real estate attorney based in Milwaukee, WI named Max Karl sought a way to allow banks to more efficiently serve borrowers with low down payment loan options by insuring home loans with private MI. To do this, Karl founded Mortgage Guaranty Insurance Corporation (MGIC) and the rest is history.

Since 1957, how has private MI helped support homeownership?

Having mortgage insurance makes originating high loan-to-value (LTV) loans safer for the financial institutions we serve, allowing them to reduce their risk and lend to credit-worthy borrowers who bring less than 20 percent down to the table. This allows borrowers to become homeowners sooner than would otherwise be possible. It also allows homeowners to build the kind of long-term wealth that comes with having equity in a home.

Why should borrowers consider private MI?

I encourage borrowers to thoroughly explore all home loan options when buying a home; being well informed is the key to making the best choice based on one’s individual needs. That said, private MI offers an affordable and sustainable low down payment path to homeownership. What’s more, unlike some other low down payment programs, private MI automatically cancels once a homeowner reaches 78 percent equity in his or her home (or 80 percent equity upon request) and meets investor and/or Homeowner Protection Act requirements. This benefit of private MI can save homeowners thousands of dollars over the life of their loan.

How does private MI fit into the mortgage finance system?

Simply put, private MI helps reduce risk in the mortgage financing system by putting private capital in front of taxpayers and the federal government. Private MI does this by meeting a requirement established by Congress that low down payment loans sold to the government-sponsored enterprises Fannie Mae or Freddie Mac (the GSEs) have extra credit protection.

If the borrower defaults on their loan and there isn’t enough equity in the home to cover what is owed on the mortgage, private MI is there to offset the loss. With the GSEs in conservatorship and the government effectively guaranteeing the loans assumed on the GSEs’ balance sheets, taxpayers face direct exposure to mortgage credit losses experienced by the GSEs. When private MI is in place, private capital – not taxpayers – cover the first losses on a default up to certain coverage limits.

To give you an idea of what that means in real dollars, the private MI industry has paid more than $50 billion in claims for losses to the GSEs since they entered conservatorship during the 2008 financial crisis

What’s changed in the private MI industry over the past 60 years?

I like to say “this isn’t our father’s MI.” The private MI industry has been through a lot in its 60-year history. Most recently, we learned some valuable lessons during the Great Recession. Prior to that, the industry had never experienced a coast-to-coast collapse in the housing market. It’s true there have been times of great economic hardship during the industry’s history, but nothing as widespread as this most recent economic downturn.

While the private MI industry’s commitment to helping expand homeownership in an affordable, sustainable way remains steadfast, it has incorporated the lessons learned from the Great Recession into how it operates today. This includes the industry’s capital standards and how it views, evaluates, and prices for risk.

These lessons have made the private MI industry a stronger partner with its customers and it is in a great position for the future.

Speaking of the future, what do you see for private MI going forward?

The private MI industry is in the midst of a once in a generation opportunity to positively reform the country’s housing finance system. To do it right, there must be a comprehensive approach to evaluate what the proper role is for the GSEs, FHA, and private capital.

Private mortgage insurers are ready, willing, and able to take on a larger role in housing finance. The industry’s transparent, risk-adjusted capital requirements set it apart from other forms of credit enhancement, and that stability – coupled with 60 years of experience insuring high LTV-residential mortgages – puts it in a unique position to support the expansion of homeownership.

As our county’s leaders continue to explore housing finance reform, it only makes sense for them to consider how they can leverage the private MI industry’s inclusive and scalable business model.

Newsletter: March 2017

Posted on by Rhina Portillo

Here is a roundup of recent news in the housing finance industry, including a blog post by USMI Chairman Patrick Sinks on the value of enhanced lending standards and practices, the release of a new column explaining low down payment mortgage options, a report on the Federal Housing Administration’s (FHA) exposure to risky loans, and the Federal Housing Finance Agency’s (FHFA) response to criticism over the GSEs’ entrance into financing single-family rental homes:

  • USMI Chairman Writes on Lending Standards. In a recent blog post by Patrick Sinks, the President and CEO of MGIC and Chairman of USMI, he argues that the federal government must balance important protections provided by new lending standards with reasonable consumer access to credit. Sinks also says that there must be uniform lending standards in the housing finance industry to promote consistency in the market. Sinks writes:“The safeguards that came into the marketplace for borrowers, lenders, investors, and ultimately taxpayers with the implementation of the QM standard have been helpful in improving the credit quality of the housing market in the United States… The QM rule has and will continue to be a solid foundation for responsible underwriting and borrowing in our housing system. As new housing policy or reforms to existing policies are considered, it is important that the foundations of the QM rule remain intact while also balancing the need to ensure creditworthy borrowers aren’t unnecessarily or unintentionally left on the sidelines.”
  • New Column on Low Down Payment Mortgages. A new column has been released that gives consumers the “lowdown” on low down payment mortgages. The column explains the options available to potential homebuyers who can’t afford a 20 percent down payment, giving them the pros and cons of several mortgage loan options.
  • Riskier Borrowers Make Up Growing Share of Government-Backed FHA Loans. According to USA Today, riskier borrowers are making up a growing share of new mortgages backed by the FHA, which have been pushing up delinquencies and raising concerns about a spike in defaults that could harm the housing recovery.In addition, the Inspector General for the Department of Housing and Urban Development (HUD) released a report that found HUD failed to adequately oversee billions of dollars of risky FHA loans, thereby putting the FHA’s Mutual Mortgage Insurance Fund at greater risk.
  • FHFA Director Mel Watt Defends Fannie Mae Deal with Blackstone. Politico Pro(subscription required) reported that FHFA Director Mel Watt is defending the $1 billion deal between Fannie Mae and private equity firm Blackstone to guarantee the company’s loans on 50,000 single-family rental units. Watt defended the deal in letters to the National Association of Realtors and House Democrats, each of whom have written letters to the FHFA expressing their opposition to the deal. According to Bloomberg News, Freddie Mac may also move toward backing loans that finance single-family rental (SFR) homes.

Blog: Balancing Important Protections Provided by Improved Underwriting Standards with Reasonable Consumer Access to Credit

Posted on by dcadmin

by Patrick Sinks, President and CEO, MGIC and Chairman of USMI

Since the 2008 financial crisis, certain safeguards were put in place that resulted in more stringent underwriting standards for lenders and borrowers. As a mortgage insurer, lenders are my customers. For borrowers who don’t put 20% down – which is not a requirement – and are viewed by lenders as higher credit risk, mortgage insurers reduce or eliminate losses by providing protection to the lender in the event of a foreclosure. In doing so, mortgage insurance (MI) allows qualified homebuyers with low down payments (borrowers can put as little as 3% down with mortgage insurance) to qualify for mortgages because of the guarantee mortgage insurers provide to the system. If a borrower ends up suffering a foreclosure, we are in the so-called “first loss” position, and pay claims to the affected lender.

Today, there is a discussion in Washington about reforming some of the more far-reaching and costly regulations associated with the Dodd-Frank Act, including the Qualified Mortgage (“QM”) rule. To be sure, as a mortgage insurer, we have witnessed the difficulty within the mortgage lending sector to understand, implement, and comply with all the new rules and regulations, all the while ensuring mortgage credit remains available. Safe and prudent lending standards must remain intact throughout the system to avoid another housing crisis, though we must also ensure affordable mortgages don’t become out of reach for creditworthy buyers. There is a balance that must be struck. Three years after the QM rule was adopted, it is highly appropriate for industry and policymakers to ensure that there remains a balance between prudent lending and access to credit.

What the QM Rule Does

The QM rule for conventional mortgages, which was promulgated by the Consumer Financial Protection Bureau (CFPB), went into effect in January 2014 to protect borrowers, lenders, and the U.S. financial system, from risky lending practices that contributed to the housing crisis and its ripple effects throughout the economy.

Also known as the “ability to repay” rule, QM takes into account a borrower’s risk and financial situation, prohibits the use of some of the riskiest types of mortgage from the pre-2008 era, and provides legal protections for lenders if they meet strict underwriting standards.

Because of these features, qualified mortgages sold into mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac (government-sponsored entities, or “GSEs”), are designed as safer investments with less risk exposure to the federal government, and therefore create less risk to taxpayers. During the financial crisis, prior to the QM rule’s existence, the GSEs took a combined $187 billion taxpayer bailout when riskier mortgage loans that the GSEs guaranteed devalued, creating catastrophic losses.

How Does the Current QM Rule Work?

To prevent government and taxpayer exposure to such housing credit risk, the QM rule requires strong underwriting standards that take into account a borrower’s financial profile, such as credit score, as well as establishes requirements for processes that lenders must follow when originating a mortgage. According to the CFPB, the general requirements needed for making a qualified mortgage include:

  • Good-faith determination of a borrower’s “ability to repay” his or her mortgage
  • No excessive upfront fees
  • Elimination of certain loan features, including “interest-only” payment periods, negative amortization, balloon payments, and loan terms longer than 30 years
  • Legal protections for lenders

Why Lending Standards are Critical

The safeguards that came into the marketplace for borrowers, lenders, investors, and ultimately taxpayers with the implementation of the QM standard have been helpful in improving the credit quality of the housing market in the United States. Since the QM rule went into effect, the default rate on loans held by the GSEs has dramatically declined. For example, for mortgages originated at the height of the housing crisis in 2007, the cumulative default rate on loans held by Fannie Mae totaled 14.4%, while for Freddie Mac it was 8.3%. Following the enactment of the CFPB’s QM rule in January 2014, the cumulative default rates for the loans backed by the GSEs have fallen to nearly zero in 2015 and 2016. As noted before, while there have been improvements to credit quality, legitimate concerns are being raised by many stakeholders about whether mortgage credit has become too restricted. The average FICO credit score of a Fannie Mae and Freddie Mac low down payment borrower is over 750, which by all accounts is considered excellent credit. These questions on the access to credit underscore the need to review underwriting standards to ensure they do not overly restrict credit to creditworthy borrowers leaving the question of whether the pendulum has swung too far.

Uniform Lending Standards are Important

While consistency and uniformity are important to nearly all industries, there is a great need for uniform lending standards and rules in the housing finance industry. Currently, the CFPB and the Department of Housing and Urban Development (HUD) have QM rules that are not uniform, which leads to gross inconsistencies in the housing finance industry. For example, the Federal Housing Administration’s (FHA) upfront mortgage insurance premium is excluded from the QM rule’s cap on points and fees, while the private MI upfront premium is included. This inconsistency effectively precludes the financing of MI premiums into the loan amount, leading to higher monthly payments for borrowers. If the QM rules are changed, it should be to align underwriting standards for GSE-backed loans and loans backed by the FHA, which are 100% government-guaranteed. The same standards should be applied to both the GSEs and FHA, given they effectively serve the same low down payment borrowers.

Keep Prudent Lending Standards Intact

Mortgage insurers are required by law to build contingency reserves, meaning that in addition to the capital our companies are required to hold against the risk we insure, a portion of every premium dollar received is reserved specifically for emergencies on a countercyclical basis. In 2015, the Federal Housing Finance Agency (FHFA) implemented even stronger capital requirements called Private Mortgage Insurance Eligibility Requirements (PMIERs), which nearly doubled the amount of capital required for MIs to be approved to insure loans acquired by the GSEs. PMIERs, regulators affirm, reduce Fannie Mae and Freddie Mac’s risk exposure. The same can be said of the QM rule.

The MI industry fully appreciates the impact of the QM rule, and what it takes for lenders to conduct business within the boundaries of the rule, while working to provide access to mortgage credit to homebuyers. Lenders and others in the mortgage finance business are not the only ones impacted by new standards. New rules mean consumers could face different or tightened credit, making it longer to qualify for a mortgage. For some borrowers, new rules mean enhanced lending standards.

The QM rule has and will continue to be a solid foundation for responsible underwriting and borrowing in our housing system. As new housing policy or reforms to existing policies are considered, it is important that the foundations of the QM rule remain intact while also balancing the need to ensure creditworthy borrowers aren’t unnecessarily or unintentionally left on the sidelines.