USMI President Lindsey Johnson appeared on the ‘The Business Credit & Financing Show’ podcast with Ty Crandall to discuss the role of private mortgage insurance in helping people buy their first home without breaking the bank.
Category: News
Statement: HUD’s 2019 Annual Report to Congress
WASHINGTON— Lindsey Johnson, President of the U.S. Mortgage Insurers (USMI), released the following statement today on the U.S. Department of Housing and Urban Development (HUD) release of its 2019 Annual Report to Congress on the financial status of the Federal Housing Administration’s (FHA) Mutual Mortgage Insurance Fund (MMIF):
“USMI appreciates HUD’s thorough analysis of the MMIF’s economic condition and the release of valuable data on FHA borrower trends and mortgage performance. According to the report, the MMIF’s capital ratio stands at 4.84 percent, up from 2.76 percent last year, continuing the much-needed upward trend above the thin statutory requirement of only 2 percent. We applaud the FHA’s continued efforts to stabilize and further strengthen the fiscal health of the fund so that the FHA can continue its important role alongside the rest of us in serving the low-down payment market. We are encouraged by the longer-term focus of FHA as stated in their Annual Report, recognizing that ‘the MMI capital ratio is a result, not the target.’ Given the ‘extreme risk layering’ that FHA cites is on the rise, the cyclicality of the mortgage market, and the volatility of the Home Equity Conversion Mortgage (HECM) program, USMI agrees with the Administration’s actions to ensure that FHA can withstand another housing downturn and serve its important countercyclical role.
“In the Annual Report, Secretary Carson highlights that ‘[i]n our Housing Finance Reform Plan released in September of this year, we propose a number of solutions that would reduce risks to the MMI Fund, protect taxpayers from future bailouts, and ensure the FHA maintains its focus on providing access to mortgage financing to low- and moderate-income families that cannot be fulfilled through traditional underwriting.’The FHA is a very important part of the housing finance system, and USMI has long called for a more complementary, not competitive, role between FHA and the conventional market. Thankfully, today there is a vibrant low-down payment conventional market backed by private capital that continues to prudently facilitate the low-down payment credit needs of millions of Americans, giving consumers more options and shielding taxpayers from undue risk. In the past year alone, the private mortgage insurance (MI) industry helped more than 1.1 million people purchase or refinance their home—nearly 60 percent of purchasers were first time homebuyers and more than 40 percent of borrowers with private MI had annual incomes of $75,000 or less.
“Private MI continues to be well positioned to play a leading role in enabling borrowers to access affordable and sustainable low-down payment mortgage credit and serving as the first layer of protection against mortgage defaults to protect U.S. taxpayers and the federal government. In this sense, private MIs hold nearly double the capital assets that they held before the financial crisis, and just last week, USMI released details on the innovative growth of private MI credit risk transfer (MI CRT). Over the last four years, through new MI CRT structures, the industry transferred nearly $34 billion in risk on nearly $1.3 trillion of insurance-in-force, enhancing MI resiliency and the risk protection provided to the conventional mortgage market.
“Going forward, USMI and our member companies look forward to working with FHA and the Administration to promote complementary roles for the conventional market and FHA in the low-down payment lending space in order to best serve borrowers and protect taxpayers.”
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U.S. Mortgage Insurers (USMI) is dedicated to a housing finance system backed by private capital that enables access to housing finance for borrowers while protecting taxpayers. Mortgage insurance offers an effective way to make mortgage credit available to more people. USMI is ready to help build the future of homeownership. Learn more at www.usmi.org.
Newsletter: November 2019
CONGRATS TO THE NATS! While the baseball season has officially ended, housing finance reform still has a few innings left in the game. On Monday, National Mortgage News reported on U.S. Mortgage Insurers’ (USMI) release of new details on the growing mortgage insurance credit risk transfer (MI CRT) market. USMI President Lindsey Johnson also spoke about innovative MI CRT on a panel at the Structured Finance Association’s (SFA) Residential Finance Symposium. On the housing finance reform front, Federal Housing Finance Agency (FHFA) Director Mark Calabria said that he is currently in negotiations with the Treasury Department to amend the Preferred Stock Purchase Agreements (PSPAs). He also spoke at an event hosted by the American Action Forum (AAF), where he was followed by a panel discussion on housing finance reform. Last week, FHFA released its 2019 Strategic Plan and 2020 Scorecard for Fannie Mae and Freddie Mac (“the GSEs”). This comes following several recent comments by Director Calabria reiterating the agency’s commitment to responsibly ending the GSEs’ conservatorships. In mid-October, Citizens Against Government Waste (CAGW) applauded the direction of FHFA under Director Calabria’s leadership. Lastly, we’re seeing more movement coming with the nomination of Brian Montgomery as Deputy Secretary of the Department of Housing and Urban Development (HUD) in early October.
Despite a busy month, there’s still plenty to look forward to at the #NEXTDC19 conference on November 18 and 19, which will bring policy experts together and create a great stage for lively discussions on the future of housing policy. Most importantly, ahead of the Veterans Day holiday, we want to thank and recognize all of the veterans who have bravely served in the United States Armed Forces. We are grateful for your service.
USMI announces details on MI Credit Risk Transfer. On November 4, USMI announced that private MI companies transferred nearly $34 billion in risk on nearly $1.3 trillion of insurance-in-force from 2015 to 2019 to the global reinsurance and capital markets. USMI released details on the development and growth of the MI CRT market, which outlines the types of structures being used by the industry to transfer risk to reduce volatility and exposure of mortgage credit risk within the mortgage finance system, including to the GSEs, and therefore taxpayers. It also finds that active adoption of CRT by private mortgage insurers has transformed the industry to better insulate it from cyclical mortgage markets and enhanced MIs’ ability to be more stable, long-term managers and distributors of credit risk.
USMI President Lindsey Johnson spoke to MI CRT on a panel at the SFA’s Residential Finance Symposium. She also spoke with National Mortgage News on the innovative ways private MI is now actively managing mortgage credit risk. Johnson stated that in recent years mortgage insurers are not just participating in GSE CRT transactions, but also distributing their own risk through MI CRT.
AAF hosts panel discussion on housing finance reform. On November 6, AAF hosted a panel titled, “Fannie Mae and Freddie Mac: What’s Next?” Speakers included FHFA Director Mark Calabria; Dr. Norbert Michel, Director of the Center for Data Analysis at the Heritage Foundation; Dr. Michael Stegman, Senior Fellow of the Housing Finance Program at the Milken Institute Center for Financial Markets; and Thomas Wade, Director of Financial Services Policy at AAF. The panel was moderated by CNN’s senior economics writer, Donna Borak. The panel discussed the Treasury Department’s and HUD’s GSE Reform Plans, FHFA’s and Treasury’s actions to allow for the recapitalization of the GSEs, and additional reform initiatives by the Administration.
FHFA releases new Strategic Plan and Scorecard for Fannie Mae and Freddie Mac. On October 28, FHFA released its 2019 Strategic Plan and 2020 Scorecard, detailing the near-term future for the GSEs. In the Strategic Plan, FHFA provided a roadmap on how the GSEs will fulfill their statutory missions and maintain their focus on safety and soundness while preparing for what the FHFA calls “a responsible end to the conservatorships.” The 2020 Scorecard details how the GSEs will remain accountable for “the effective implementation of the Strategic Plan in the coming year.” Both documents outlined three key goals: (1) foster competitive, liquid, efficient, and resilient (CLEAR) national housing finance markets that support sustainable homeownership and affordable rental housing; (2) operate in a safe and sound manner appropriate for entities in conservatorships; and (3) prepare for their eventual exit from conservatorships.
In FHFA’s press release, Director Calabria said, “Our nation’s mortgage finance system is in urgent need of reform. The vision for reform articulated in the Strategic Plan and advanced in the Scorecard will serve borrowers and renters by preserving mortgage credit availability, protect taxpayers by ensuring Fannie Mae and Freddie Mac can withstand an economic downturn, and support a strong and resilient secondary mortgage market.”
FHFA intensely focused on the GSEs exiting conservatorship. At a meeting with reporters on October 31, Director Calabria noted that he is not giving Fannie and Freddie an easy pass. “I’ll certainly say I have yet to meet anybody who wants to get out of conservatorship as much as Fannie and Freddie do. But certainly, what you’ve been seeing over the last few years is not the kind of day-to-day behavior that you would expect from companies that are in conservatorship.”
Earlier that week, Director Calabria gave a keynote speech at the Mortgage Bankers Association’s Annual Convention in Austin, TX, and explained that after just one quarter of capital retention where Fannie and Freddie profits weren’t swept to Treasury, the companies doubled their capital buffers. “Fannie and Freddie will move forward thoughtfully, but this does not mean moving slowly.” But as exiting the conservatorship moves closer, Director Calabria explained he will ensure that it is done right. “I will not end the conservatorship unless I am confident that once Fannie and Freddie leave, they will never have to return.”
CAGW applauds FHFA’s new leadership. On October 16, CAGW wrote that “Mark Calabria is moving FHFA in a new direction and making taxpayers his top priority.” CAGW provided several examples of Director Calabria’s work, including FHFA’s focus on building capital at the GSEs to protect taxpayers, revising the GSEs’ multifamily lending caps, and the termination of the GSEs’ Mortgage Servicing Rights (MSR) pilot program. Regarding the MSR pilot, CAGW noted that FHFA should apply this logic to any other pilots that allow the GSEs to push into markets and engage in activities that are already thriving. It is promising that Director Calabria is reviewing all pilots and new activities that expand the GSEs’ market dominance and encourages the enterprises to expose taxpayers to additional risk.”
Nomination of Brian Montgomery as HUD Deputy Secretary. On October 8, HUD announced that Commissioner Montgomery had been nominated to serve as Deputy Secretary and the Senate Banking Committee will consider his nomination on November 20. Montgomery, who also serves as HUD’s Assistant Secretary for Housing and Federal Housing Commissioner, would manage the day-to-day operations of the agency and assist Secretary Carson in leading the department’s nearly 8,000 employees. USMI applauded the decision, noting “Commissioner Montgomery is a respected, seasoned mortgage finance expert, and his unique experience and past public service have been major assets to the FHA. His extensive background will allow him to immediately begin work on the most important issues facing the housing finance system.”
Upcoming events. The#NEXTDC19 conference is an event focused on delivering policy intel. On November 18 and 19, it will bring together the most influential housing policy leaders, mortgage lenders, and fintech firms.
Press Release: Private Mortgage Insurers Transfer Nearly $34 Billion in Risk on Nearly $1.3 Trillion of Insurance-in-Force from 2015-2019
USMI releases details on the developments and growth of private mortgage insurance credit risk transfer
WASHINGTON — U.S. Mortgage Insurers (USMI) today announced that private mortgage insurance (MI) companies transferred nearly $34 billion in risk on nearly $1.3 trillion of insurance-in-force from 2015 to 2019. USMI released details on the developments and growth of the MI credit risk transfer (MI CRT) market, which outlines the types of structures being used by the industry to transfer risk to reduce volatility and exposure of mortgage credit risk within the mortgage finance system, including to the government sponsored-enterprises (GSEs), and therefore taxpayers. It also finds that active adoption of CRT by private mortgage insurers has transformed the industry to help better insulate it from the cyclical mortgage market and enhanced their ability to be more stable, long-term managers and distributors of risk.
“Through innovative new MI CRT structures, the industry is taking additional steps to enhance MI resiliency and the risk protection provided to the conventional mortgage market. MI CRT demonstrates that MI companies are sophisticated experts in pricing and actively managing mortgage credit risk,” said Lindsey Johnson, President of USMI. “Private MI plays a critical function in the housing finance system by serving as the first layer of protection against mortgage defaults. MI is also one of the only sources of private capital that has been available through all market cycles. After the financial crisis, the MI industry improved its safety and soundness through enhanced capital and operational standards, which in turn made us more resilient to withstand severe economic stress.”
USMI examined the two main MI CRT structures: Reinsurance and Capital Markets. It found that mortgage insurers have executed 18 reinsurance deals since 2015, transferring over $25 billion of risk on over $530 billion of insurance-in-force. As for the Capital Markets structure, the industry introduced MI Insurance Linked Note (ILN) programs beginning in 2015. Since then, mortgage insurers have issued 19 ILN deals, transferring $7.8 billion of risk on over $730 billion ofinsurance-in-force.
“While the MI industry has distributed credit risk for decades, these innovative CRT structures adopted by the industry in 2015 have transformed it from a ‘buy-and-hold’ into an ‘aggregate-manage-and-distribute’ model,” said Johnson. “The financial risk management approach of private MI companies has become much more countercyclical and significantly benefits the housing finance system.”
Because private mortgage insurers typically hold a portion of the first loss there is an alignment of incentives that ensures quality underwriting continues to be done by the industry, which reduces investors’ risk exposure, and ensures quality control on risk for investors and within the broader financial system. The investor base in these transactions continues to grow exponentially as the frequency of transactions increases, and the MI CRT investors to date represent trillions of dollars of private capital under management that provides a stable, deep pool of liquidity for the market.
“The MI CRT structures underscore the resilient nature and benefits of MI and the private capital it supplies to the housing market, safeguarding taxpayers against mortgage defaults, and ensuring that the private MI industry will continue to play a vital role in the mortgage finance system,” added Johnson.
More information on MI CRT is available 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.
Statement: Nomination of Brian Montgomery as Deputy Secretary of the HUD
WASHINGTON — Lindsey Johnson, President of U.S. Mortgage Insurers (USMI), today issued the following statement on the President’s intent to nominate Federal Housing Administration (FHA) Commissioner Brian Montgomery as Deputy Secretary of the U.S. Department of Housing and Urban Development (HUD):
“USMI applauds the White House’s intent to nominate Brian Montgomery to serve as the Deputy Secretary of HUD. Commissioner Montgomery is a respected, seasoned mortgage finance expert, and his unique experience and past public service have been major assets to the FHA. His extensive background will allow him to immediately begin work on the most important issues facing the housing finance system. USMI and the private mortgage insurance industry look forward to working with Commissioner Montgomery going forward to establish a coordinated and robust housing finance system that prudently enables homeownership for American families.”
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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: September 2019
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
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 ‘The Real Estate Way To Wealth And Freedom’
USMI President Lindsey Johnson appeared on ‘The Real Estate Way to Wealth and Freedom” podcast with Jacob Ayers to discuss the value of private mortgage insurance to borrowers and tax payers and how private mortgage insurance creates a stable housing finance system.
Listen to the full episode here.
Podcast: President Lindsey Johnson on ‘Engage with Andy Busch’
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.
Statement: The Administration’s Housing Finance Reform Reports
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
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
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
