News Filter: Articles & Op-Ed’s

Op-Ed: Low Down Payments Backed by Mortgage Insurance More Important Than Ever

Posted on by dcadmin
By: Lindsey Johnson

Today, the place you call home matters more than ever. Unfortunately, many Americans continue to believe homeownership is out of reach because they think a 20 percent down payment is needed to qualify for a mortgage.

A recent report by the private mortgage insurance (MI) industry finds that it could take a family earning the national median income over 20 years to save for a 20 percent down payment. But the wait decreases by 67 percent when a five percent down payment is the goal. Fortunately, millions of homebuyers each year qualify for home financing with low down payments.

Given the current economic environment due to COVID-19 and the desire of many people to keep more cash on-hand, low down payment loans are more important than ever. Low down payment mortgages with private mortgage insurance have proven to be a time-tested means for Americans to access affordable homeownership sooner while still providing credit risk protection and stability to the U.S. housing system. It is no wonder why more than 33 million homeowners have used this type of home financing and why its use is on the rise.

The report finds that in 2019, the number of low down payment loans backed by private MI increased 22.9 percent. Over 1.3 million home loans were purchased or refinanced with private MI, up from just over 1 million in 2018. Nearly 60 percent of the borrowers of these loans were first-time homebuyers and 40 percent had annual incomes of less than $75,000.

Why have millions turned to this type home financing?

Let us first take a closer look at a borrower who earns the national median income of $63,179. To save 20 percent, plus closing costs, for a $274,600 home, the median sales price for a single-family home last year, they would need to bring more than $63,000 in cash to the table. It could take up to 21 years to save up this amount based on the national savings rate dedicated towards a mortgage. But if this borrower qualifies using private MI on a five percent down payment mortgage, their wait time drops to just seven years. This type of home financing offers Americans a chance to secure home financing much sooner than previously believed.

Why is 20% the “magic number”?

Data demonstrates that borrowers who make larger down payments are less likely to default on their mortgages than borrowers with lower down payments. Therefore, lenders traditionally require a 20 percent down payment to offer mortgage financing to a borrower. This is where mortgage insurance steps in, providing credit enhancement for the borrower with a lower down payment, and insuring the loan for the lender in the event the borrower stops making their payments. Once the borrower builds 20 percent equity in their mortgage, the insurance can be cancelled, thus lowering the monthly payment. Private MI also helps Americans buy a home without necessarily breaking the bank.

Private mortgage insurance is offered on so-called conventional loans that are backed by the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. When there is private MI on a loan, the risk protection provided to lenders for making a low down payment mortgage possible is extended to the GSEs too. In the event of a default, the private mortgage insurance stands to cover losses first, meaning private MI also protects taxpayers.

Supporting the American Dream

As the report demonstrates, private mortgage insurers’ role in the low down payment market significantly increased over the last five years. Between 2015 and 2019, private mortgage insurers’ market share in the low down payment lending sector increased from 34.8 percent of the insured market in 2015 to 44.7 percent in 2019, helping millions of Americans qualify for home financing.

Private MI offers a reliable path to the American dream of owning a home. Since 1957, private MI has helped more than 33 million Americans become homeowners while protecting taxpayers. And right now, more than ever, we are even more aware of the benefits of owning a home—from building wealth to creating stability to the importance of having a safe place to call your own.

Lindsey Johnson is the president of the U.S. Mortgage Insurers (USMI), the association representing the nation’s leading private mortgage insurance companies.

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Mortgage Professional America originally published USMI President Lindsey Johnson’s opinion piece, “Low down payments backed by mortgage insurance more important than ever” on August 10, 2020. 

Op-Ed: No, The FHA Should Not Be Pushed to the Brink Again

Posted on by dcadmin
By: Lindsey Johnson

 

Some hailed the Department of Housing and Urban Development’s annual report on the Federal Housing Administration’s financial status as evidence that the government mortgage insurance program should lower its fees. And they said that FHA should consider expanding its footprint in the housing finance market.

But HUD Secretary Ben Carson made clear that while FHA’s financial health has improved, it should “maintain its focus on providing access to mortgage financing to low- and moderate-income families that cannot be fulfilled through traditional underwriting.”

The FHA serves an important countercyclical role in the housing finance system; however, it is important that policymakers recognize that there is a vibrant conventional market that is able to serve many borrowers and prudently help them access affordable mortgage finance. Further, because FHA-backed mortgages protect 100% of the risk, expanding the FHA would mean expanding taxpayer exposure to that risk. This is simply not necessary.

Indeed, low down payment lending is critically important to the U.S. housing system. It gives many first-time home buyers access to the conventional mortgage market without requiring them to put a full 20% down. In the third quarter of 2019, nearly 80% of first-time homebuyers used these mortgages — 35% of which were backed by private mortgage insurance. With the private sector taking the first-loss risk exposure on these loans, the federal government, and thus taxpayers, are far more protected from mortgage credit risk.

The FHA-insured market and the conventional market should complement one another rather than compete. The conventional market — where the credit risk is backed by private capital — is well positioned to play a bigger role in facilitating access to affordable credit. It can do so without unnecessarily saddling the government or taxpayers with risk.

This better enables the FHA to focus on its mission of supporting those borrowers who do not have access to traditional financing — and to ensure it can play its countercyclical role through all market cycles.

In 2018, conventional loans with private MI helped more than one million low down payment borrowers — nearly 60% of which were first-time homebuyers and nearly 40% had incomes below $75,000. And in the first three quarters of 2019, nearly 47% of insured loans had private MI and the industry supported almost $275 billion in new originations. On the other hand, the FHA has over $1.2 trillion of outstanding risk exposure in 2019, according to the HUD report.

For borrowers, conventional low down payment mortgages with private MI are a good deal, because they are affordable despite a higher loan-to-value ratio and the insurance cancels once 20% equity is built. This results in direct savings for the borrower, compared to the FHA where premiums are typically paid for the life of the loan. Further, according to a recent analysis by the Urban Institute, loans with private MI were more affordable than loans backed by FHA for the majority of credit score and down payment cohorts for low down payment borrowers. And for the housing system these loans are a good deal because compared to FHA-backed mortgages, there is less risk exposure for taxpayers. Plus private mortgage insurers serve as a second set of eyes during the underwriting process to ensure that borrowers are set up for sustainable homeownership.

Instead of asking how FHA lending can be expanded the debate should revolve around prudently making low down payment mortgages in general more affordable and accessible to ensure risk is being managed appropriately. It can be done. Secretary Carson and other regulators have outlined in their recent reform plans ways to promote private capital supporting the housing finance system where possible.

Further the mortgage credit landscape is very different today than it was prefinancial crisis, largely due to new statutory restrictions of mortgage product features and federal regulation. For example, the Qualified Mortgage Rule provides the necessary safeguards for lending and underwriting. These safeguards, including measurable thresholds to assess a borrower’s ability-to-repay, have resulted in much better and safer mortgages being originated. In fact, foreclosure rates are at a 20-year low.

As regulators assess changes to mortgage underwriting requirements, including the expiration of the GSE patch in the QM Rule, these changes should be done in a coordinated manner with federal housing agencies by collaborating to create and implement a harmonized standard that can apply across the conventional and FHA mortgage markets alike to ensure a level playing field. Otherwise, the resulting regulatory patchwork could create arbitrage opportunities, lock some consumers out of the market due to higher costs, and merely shift, rather than reduce, the government’s exposure to mortgage credit risk.

Our housing regulators have a significant opportunity to strike the right balance to ensure that both access and risk are managed throughout the mortgage finance system. Private mortgage insurers understand this delicate balance and look forward to working with them to achieve sustainable levels for each.

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National Mortgage News originally published USMI President Lindsey Johnson’s opinion piece, “No, the FHA should not be pushed to the brink again” on December 24. The piece was also published by American Banker.

Article: Data confirms buyers don’t need to wait decades to save up to buy a home

Posted on by dcadmin

By Brad Shuster

June is National Homeownership Month, and this year we celebrate amidst a national conversation about how best to reform the U.S. housing finance system to sustain and grow homeownership in a safe and affordable way. This should excite all Americans who are currently seeking to become homeowners and all those who will in the future, because maintaining access to low down payment mortgages continues to be critically important for millions of Americans to realize the dream of homeownership.

Last year alone, more than one million Americans purchased or refinanced a home using mortgages with private mortgage insurance (MI). They were able to overcome the widely held misconception that buyers need a 20 percent down payment, an amount that would take the average American family more than 20 years to save. Of the more than one million families that used private MI in 2018, nearly 60 percent were first-time homeowners who on average saved only 5 percent of the home purchase price as a down payment. Private MI allowed these borrowers to access the conventional mortgage market with sustainable, affordable mortgage options. In Washington, policymakers are currently exploring ways to help even more households realize homeownership the same way.

A new report showcases how private MI helps hard-working, home-ready families who access the conventional mortgage market, even when they don’t have a large down payment. The report highlights that in 2018, more than 40 percent of buyers with private MI had annual incomes below $75,000, and that there were significant wait times for prospective homebuyers attempting to save for a full 20 percent down payment. The report also underscores the significant mortgage credit risk protection that private MI provides to American taxpayers and the federal government.

The report, released by the U.S. Mortgage Insurers (USMI), finds it could take on average 20 years for a family earning the national median income of $61,372 to save 20 percent (plus closing costs) for a $262,250 single-family home, the national median sales price. However, this drops to seven years if the borrower uses a low down payment mortgage with five percent down. This represents a 65 percent decrease in wait time at the national level, and USMI found the same percentage decrease at the state level.

Unfortunately, today millions of Americans nationwide believe homeownership is out of reach. While there are many reasons for prospective homeowners to perceive homeownership as unachievable, including student debt or low wage growth, the most pervasive misconception is that they need to have a 20 percent down payment, according to the National Association of REALTORS. That is simply untrue. There are a variety of mortgage options available that can help prospective borrowers buy homes with as little as 3 percent down – such as conventional loans with private MI and government-backed loans like those insured by the Federal Housing Administration (FHA). Each option offers something different and has advantages and disadvantages, but as the new USMI report shows, private MI provides a safe and affordable way to buy a home for millions of families.

It is important for policymakers to understand the long, time-tested role MI has played as they seek to create a more robust housing finance system. Private MI serves as protection against mortgage credit risk if a borrower defaults on their mortgage. This means that every dollar a mortgage insurer covers when a borrower defaults is a dollar that Fannie Mae and Freddie Mac (the “GSEs”) and American taxpayers do not have to pay. In fact, since the 2008 financial crisis the MI industry has paid over $50 billion in claims – losses the government and taxpayers did not have to bear.

As the conversation continues over how to best increase American homeownership – a cornerstone of the U.S. economy – and protect taxpayers and the federal government along the way, this report provides valuable facts for the policymakers and regulators engaged in these discussions. The private MI industry’s long history of success in helping Americans qualify for low down payment mortgages highlights its critical role in the housing finance system, and we stand ready to do more to create a stronger and more sustainable housing market.

This column was published in The Hill on June 13, 2019.

Op-Ed: Private insurance plays a critical part in home mortgage ecosystem

Posted on by dcadmin

 

 

 

 

By Lindsey Johnson

2/17/19

Housing finance reform remains a priority in Washington. Earlier this month, Senate Banking Committee Chairman Mike Crapo (R-Idaho) released a proposal to reform the government-sponsored enterprises, Fannie Mae and Freddie Mac.

Like many other proposals, including House Financial Services Committee Chairwoman Maxine Waters’ (D-Calif.) HOME Forward draft legislation, Chairman Crapo’s proposal recognizes the important role that private capital — and specifically private mortgage insurance — serves to facilitate homeownership for low down-payment borrowers and protect taxpayers from mortgage credit risk.

The nominee for director of the Federal Housing Finance Agency (FHFA), Mark Calabria, recently appeared before the Senate Banking Committee as part of his confirmation process. He’s an individual who appreciates the benefits that private mortgage insurance extends beyond protecting the government and taxpayers.

Private mortgage insurance remains the longest serving, time-tested way to help low down-payment borrowers qualify for home financing in the conventional market.

Our nation’s mortgage finance system is one that must balance access to credit for consumers while also shielding taxpayers. Fortunately, private mortgage insurance is uniquely and permanently dedicated to serving both objectives through all economic cycles. As such, it should remain a critical piece of any future, reformed system.

Access to affordable, low down-payment mortgages is understandably top-of-mind for many policymakers. While there is an important role for government and taxpayer-backed programs to play in the broader system, any comprehensive reform should first encourage the greater use of private capital that ensures access to affordable low down-payment mortgages in the conventional market.

Fortunately, there is generally bipartisan agreement around this principle. Facilitating this kind of mortgage lending is precisely the purpose of private mortgage insurance, which has helped more than 30 million families secure home loans over the last six decades — many of whom were first-time or middle-income homebuyers.

Last year, more than 1 million homeowners qualified to purchase or refinance their home thanks to private mortgage insurance. Of these homeowners, nearly 60 percent were first-time homebuyers and more than 40 percent had incomes below $75,000.

Congressional leaders and the Trump administration must reform the housing finance system into one that works for all Americans by protecting taxpayers while also ensuring access to affordable mortgage financing.

The Harvard Joint Center for Housing Studies projected that the U.S. would add 13.6 million households between 2015 and 2025, which means affordable low down-payment options must be part of the equation.

Mortgage insurance companies support the government-sponsored enterprises and mortgage lenders in the origination of low- to moderate- income mortgage programs that address affordable housing needs of local communities.

The private mortgage insurance industry stands ready to continue its role as the solution to enable millions of families to achieve homeownership.

A version of this op-ed originally appeared in The Hill on February 17, 2019.

Op-Ed: PMI must play crucial role in housing reform

Posted on by dcadmin

A version of this piece originally appeared on Scotsman Guide on September 25, 2018 and was written by USMI Chairman Bradley Shuster. 

Government-backed conventional mortgages totaled approximately $5.3 trillion as of summer 2018. As every follower of the mortgage finance system knows, the guarantors of this multi-trillion-dollar mortgage credit risk—Fannie Mae and Freddie Mac (the GSEs)—have remained under government control since being placed into conservatorship in 2008.

While GSE reform is contemplated by Congress each year, holistic legislative reform remains elusive. It’s time for our federal elected officials to put the GSEs on a more sustainable path so U.S. taxpayers don’t continue to bear the burden of undue mortgage credit risk.

There is encouraging news, however: some areas of reform have received consistent bipartisan support. The use of private capital to transfer credit risk away from taxpayers is widely supported by housing experts, members of Congress from both sides of the aisle, and the White House. There are a number of ways to do this, and over the past several years, the GSEs have been exploring new programs including transferring second-loss risk (so-called “mezzanine risk”) through credit risk transfer (CRT) transactions.

For over 60 years, private mortgage insurance (MI) has served as a significant means for transferring mortgage credit risk away from the federal government and taxpayers. This is for good reason: private MI is one of the only forms of loan-level credit enhancement positioned in a first-loss position to lenders and the GSEs—transferring the risk before it ever reaches the GSEs’ balance sheets. Private MI has helped nearly 30 million families become homeowners, including many first-time homebuyers and low- to moderate-income borrowers, by allowing them to receive prudently underwritten mortgages with as little as three percent down. In fact, private MI helped more than one million borrowers purchase or refinance a mortgage in 2017 alone and 56 percent of purchase loans went to first-time homebuyers. Further, private MI not only helps put families in homes but also keeps them there by being responsive to troubled borrowers and working with homeowners to avoid default with prudent modifications.

Since the financial crisis, the MI industry has taken important steps to strengthen and enhance its risk protection capabilities, particularly with the new Private Mortgage Insurer Eligibility Requirements (PMIERs) enacted in 2015, which nearly doubled the industry’s pre-crisis capital requirements. The industry has also improved its claims processes through updated Master Policy Agreements, which provide lenders with greater clarity about when and how the industry pays claims. Today, more than $930 billion in GSE mortgages have private MI coverage and the industry has covered more than $50 billion in claims since the GSEs entered conservatorship.

When a mortgage insurer pays a claim, it’s a claim that neither the lender nor taxpayers (for the GSEs) have to shoulder. It’s not just claims though; the MI industry is a leader in mortgage underwriting. As a loan level product, private MI brings to the table a second set of eyes in the underwriting process, which helps to approve low down payment borrowers for home financing while ensuring these borrowers meet today’s prudent lending requirements. This is where private MI has unique advantages over other forms of credit enhancement, and why it’s essential private MI remains a fundamental component of the way the GSEs transfer credit risk in any reformed system.

The GSEs and the Federal Housing Finance Agency (FHFA), as conservator and regulator, are experimenting with other CRT mechanisms as Congress considers reform. These different CRT mechanisms are similar to how mortgage insurers manage and distribute their own credit risk exposures. Importantly, unlike some other forms of opportunistic capital, private MI is consistently available across market cycles, ensuring borrowers will continue to have access to affordable mortgage credit even during bad economies and that taxpayers will consistently have meaningful protection against mortgage credit risk. Importantly, mortgage insurers do not just buy and hold mortgage credit risk. Over the years, the MI industry has demonstrated increasing sophistication in evaluating and managing this long-tail mortgage credit risk. For decades, the MI industry has actively participated in reinsurance transactions in the normal course of business to disperse risk to enhance its capital allocation and manage its own risk exposure.

More recently, the industry has also participated in various capital markets transactions. In April 2017, National MI (NASDAQ: NMIH) successfully completed its first securitization of MI risk with the issuance of more than $200 million of insurance-linked notes and this July announced the pricing of $264.5 million of 10-year mortgage linked notes. These securitizations not only help disperse mortgage credit risk, but also free up capital that can be used to help more borrowers purchase homes. Other MI companies are participating in similar securitizations and these transactions have established the MI industry as a nimble and innovative player in the housing and mortgage sector. Since 2013, U.S. Mortgage Insurers (USMI) members have transferred to the global capital and reinsurance markets $34 billion of risk, covering $160 billion of primary risk written.

What happens during a stressed market cycle is important to consider. The reality is much of what the GSEs have been experimenting with are forms of CRT that are not tied to housing and therefore will be unavailable for this type of mortgage credit risk when the housing sector is under stress. That’s one of the reasons why private MI remains an essential form of risk transfer for the GSEs. If the GSEs were to rely on their own balance sheets or an MI alternative that suddenly became unavailable, the government and taxpayers would be unduly exposed to risk.

And the MI industry is poised and capable of doing even more in any reformed housing system. While it is prudent for the GSEs to transfer second-loss risk into the capital markets, the MI industry remains active in underwriting and managing new credit risk—thereby reducing risk in the overall mortgage finance system—and remains committed to providing credit enhancement that protects taxpayers while ensuring borrowers have access to low down payment lending.
The MI industry and its products are among the most sophisticated and experienced in the housing finance system when it comes to risk management. The MI industry has proven to be unparalleled in its innovation and leadership in promoting homeownership for the last six decades and has much more to offer American homeowners. Lawmakers and policymakers have important work ahead of them to reform the GSEs, and the MI industry stands at the ready to ensure its invaluable services are part of any new system.

Bradley Shuster is the Chairman of the Board and CEO of National MI, and serves as current Chairman of U.S. Mortgage Insurers (USMI).

Article: More evidence of why trying to save 20 percent on a home down payment isn’t realistic

Posted on by dcadmin

By Michael Lerner, Washington Post

“One of the biggest misconceptions associated with buying a home is that you need a down payment of 20 percent of the home price. The median down payment for buyers under age 37, a group that typically includes a majority of first-time buyers, was just 7 percent last year, according to the National Association of Realtors…”

Read More on Washington Post

Op-Ed: GSEs need greater taxpayer protection upfront

Posted on by Lindsey Johnson

 

 

 


By Lindsey Johnson

Eight years after taxpayers provided them with $187 billion, Fannie Mae and Freddie Mac, two of the largest backers of mortgages, remain under government control. While these government-sponsored enterprises (GSEs) are healthier today thanks to new safeguards that have improved the stability of the mortgage finance system, the goal is to put the GSEs on a stable footing for the long term.

Efforts to reduce government, and therefore taxpayers’, risk exposure by positioning more private capital in a so-called “first loss” position ahead of the GSEs are widely supported. Several approaches are being tested through an initiative called credit risk transfer (CRT). The vast majority of CRT today occurs after the loans have already been purchased by the GSEs where they hold the risk for some time before selling a portion of it “on the back end” to a third party—primarily asset managers and hedge funds. While it’s positive to see the GSEs seek to shift risk, how this transfer occurs is a question currently vexing policymakers. And, how it is done will have significant implications for the future of housing finance.

The GSEs’ regulator, the Federal Housing Finance Agency (FHFA), recently sought input on CRT, looking specifically at front-end approaches where the risk is transferred to a third party before it reaches the GSEs’ balance sheets. While this may seem novel, there’s a highly effective form of front-end risk transfer that has existed for six decades: private mortgage insurance (MI). MI is a good answer to policymakers’ question of how to further protect taxpayers while ensuring first-time buyers have access to home financing.

Typically, on conventional GSE loans with down payments less than 20 percent, MI covers the first losses before it ever reaches the GSEs. This front-end risk protection has paid off. Since the GSEs were placed into conservatorship, MIs have covered more than $50 billion in claims to the GSEs—risk that taxpayers didn’t need to cover. MI not only protects taxpayers, it helps creditworthy families without large down payments qualify for a mortgage. In the past year, MI has helped more than 795,000 Americans purchase or refinance their home—nearly half were first-time homebuyers and more than 40 percent had incomes below $75,000.

Private MI works—today it covers up to 35 percent of the value of a loan, and because it transfers credit risk at the loan’s origination, it’s a pure form of front-end risk share. The question being considered by FHFA now relates to the expansion of the current levels of private MI. This deeper level of MI can be done in a way that is fair for lenders of all sizes, achieves the objective of reducing taxpayer exposure, and offers pricing transparency, so if there is a savings to the consumer, it can be realized.

Here are some things FHFA and the GSEs should consider for CRT:

First, the housing finance market is cyclical. Therefore, FHFA needs to make sure all CRT structures will be available in the next downturn. Through the financial crisis mortgage insurers continued to pay claims and insure new home loans. The structure of mortgage insurers contributes to economic stability for a number of reasons, including that MI companies engage in countercyclical reserving. This means they reserve premiums collected during favorable economic times so they can pay increased claims during downturns. Mortgage insurers provide credit loss protection exclusively on residential mortgages and, unlike other forms of CRT, won’t exit should the market experience volatility or stress.

Second, new GSE requirements established robust standards for the industry’s capital levels, business activities, risk management, underwriting practices, quality control, lender approval, and monitoring activities. All of this makes MI different from other capital market structures, which disappeared during the crisis and have yet to return in any meaningful volume.

Third, the mortgage finance system cannot return to being controlled by, and benefitting only a few. Unlike other forms of CRT, deeper MI coverage can be made available to lenders without any biases or advantages based on size or volume. It’s simple to implement too, as it is operationally consistent for lenders to use as current mortgage insurance. MI also doesn’t require the posting of collateral, a challenge for some smaller lenders.

Finally, transparency is fundamental to better inform market participants, to make clear if there’s any borrower benefit among the different transaction types, and to enable the formation of a deep market for these transactions. MI pricing is transparent. Rate cards are standardized and published and other reports, including securities and state insurance filings, are publicly available to lenders and borrowers.

Until Congress determines the future of housing finance, FHFA is right to explore ways to transfer more risk away from taxpayers. However, not all risk sharing programs are equally effective. Deeper MI can help our nation build a stronger, more stable housing finance system that protects taxpayers and facilitates the homeownership for millions of Americans.

A version of this article originally appeared in The Hill on October 20, 2016.

Article: Private Mortgage Insurers Make Their Mark on the Industry

Posted on by dcadmin

Private mortgage insurance companies, although few in number, play an important role in the housing finance system by creating sustainable homeownership for borrowers and taking on GSE credit risk.

Lindsey Johnson, President and Executive Director of U.S. Mortgage Insurers (USMI) offered MReport an inside view into the world of private mortgage insurers and how they are completely changing the mortgage game.

MReport: How has the private mortgage insurance (PMI) industry changed and evolved within the housing space?

Johnson: When I think about how our industry is evolving, two key words that come to mind are: reliability and relevance. As with every other financial services industry player, private mortgage insurance has increased capital levels, enhanced counterparty standards, and changed our master policy agreements to give better clarity and certainty of coverage when our claims are paid. Wehave also had new entrants into the system. During the crisis, we had three new mortgage insurers enter into the market and are competitive players along with the three members who were formerly in the industry. We also continue to operate in the affordability space by allowing borrowers who otherwise might not be able to attain the home they want because they are unable to meet the down payment requirements. We continue to increase our reliability because we have enhanced our capital, enhanced the master policy agreement, and we are positioned to provide greater risk protection to the GSEs and lenders in the future.

As the marketplace continues to evolve, there seems to be broad consensus that the GSEs need to maintain and grow their credit risk transfer programs. They continue to explore ways that they are going to shed risk. Mortgage insurers are  adapting to be well-positioned to take  additional credit risk away from the GSEs. Mortgage insurers continue to be one of the few sources out there that the GSEs can shift risk to today and are also one of the few counterparties with staying power. We are going to be there to take credit risk away from the GSEs in the good and bad economic times. In that sense, mortgage insurers continue to prove that we are as relevant today as ever.

MReport: What are some the biggest issues that PMIs face in the mortgage industry today?

Johnson: Today, some of our greatest challenges as mortgage insurers stem from the effect of government programs, including FHA and even the GSEs, where certain policies responding to the crisis, such as FHA’s expansion into the conventional market and the GSEs addition of LLPAs, have not been retracted even after eight years post-crisis. Mortgage insurers continue to be the most competitive option in many circumstances in the conventional market. We are competing with government, oftentimes when our regulatory requirements and standards were increased almost uniformly across the board, while many government programs have not had those standards enhanced or even updated. That creates challenges for all private market players.

MReport: What are some of the largest successes private mortgage insurers are experiencing?

Johnson: We continue to do our primary business very well. In the past year, mortgage insurers expanded consumer access to mortgage finance credit to more than 725,000 new homeowners. Half of those that were served by mortgage insurers were first-time homebuyers and nearly 40 percent of those were borrowers with incomes below $75,000. That is significant and something that mortgage insurers are very proud of. These are borrowers that would most likely not be able to make a typical, substantial down payment of 20 percent that is required. They are appraised by lenders as having that higher credit risk without a down payment and we know that typically borrowers are far less likely to default on their mortgage when there is a down payment. Coming up with that down payment can be a huge hurdle for homeownership. We did the calculation  to determine that if mortgage insurance wasn’t an option, how long would it take for borrowers to save for that 20 percent down payment, and we found that it could take about 20 years for the average firefighter or school teacher to save for a down payment.

MReport: How can PMIs attract borrowers that cannot afford a down payment and get them into homes? What benefit do PMIs offer?

Johnson: It begins with education. A point that often gets missed is that unlike FHA or other options that require a higher interest rate or more fees for the entire life of the loan, private mortgage insurance is paid by the borrower and is cancelable once there is a certain amount of equity built up in the home. It’s also important to understand that we continue to be in the marketplace, we continue to be very competitive with the other options out there, and we continue to be one of the safest options for individuals to get into homes where we create sustainability in the marketplace. For the GSEs, we continue to be one of the most reliable counterparties.

MReport: What piece of advice can you offer other PMIs in the industry?

Johnson: This industry has a great story to tell. It’s one of making homeownership possible for many people that would otherwise be unable to obtain the home they want. We continue to be extremely relevant in today’s housing finance system. So many of the issues that we face today we have faced in the past, and mortgage insurers have been a tested means  to serve as a credit enhancement for borrowers to get into these homes. The housing finance system will continue to evolve, and mortgage insurance is going to be a key component and a very important credit enhancement option. Mortgage insurers are dedicated to the housing finance system and are there in both good and bad economic times. As an industry, we have to continue to tell that story.

To read the entire MReport, click here.

Article: Risk Sharing Transactions: Front End vs. Back End

Posted on by dcadmin

USMI president Lindsey Johnson recently sat down for a Q&A discussion on risk sharing with DS News. Below is a portion of her discussion.

Lindsey Johnson currently serves as U.S. Mortgage Insurers (USMI) President and Executive Director. Johnson previously served as a Director on PwC’s public policy team, where she engaged policymakers on key public policy issues that impacted the firm. Prior to joining PwC, Lindsey was a former member of the Senate Banking Committee staff as the Minority Staff Director for the Senate Banking Committee’s National Security and International Trade and Finance (NSITF) Subcommittee, and served as Senior Policy Advisor to Senator Mark Kirk (R-Illinois), focusing on noteworthy banking, housing finance reform, and insurance legislation.

What is the difference between front-end risk sharing and back-end risk sharing?

The biggest difference is the fact that upfront risk sharing transactions de-risk the GSEs, or transfer the credit risk from the loans, before they hit the GSE’s balance sheets. Back-end CRTs require the GSEs to warehouse that risk for a period of time, and the GSEs decide what credit risk they’re going to offlay and who the counterparties will be. USMI members have done both, so we would not say that back-end transactions are bad. We actually are very supportive. However, one of the drawbacks or distinctions between the two, specifically back-end CRTs, is that the risk is on the balance sheets on the GSEs is subject to credit swings, which is partially what happened with the widening of the credit spreads at Freddie Mac last month when they experienced a loss.

Other challenges and drawbacks to the back-end transactions is that there is not a lot of pricing transparency to date. Also, smaller institutions have not been able to participate in the transactions. Front-end transactions provider a lot greater pricing transparency and can be accessible for the vast majority of lenders of all types and sizes, so that’s one of the benefits of front-end transactions.

Why do you think the GSEs have engaged in mostly back-end risk sharing to this point?

The FHFA reported in their white paper back in August that since 2012, the GSEs have purchased approximately $3 trillion in mortgage loans, of which just over around 20 percent of the loans—about $667 billion in unpaid principal balance—has been transferred via riskshare, but out of that, less than 1 percent of the risk has been transferred via front-end risk sharing. I think part of the reason, and it’s pretty understandable if this is the case, is that the GSEs can control the process in the entire back-end transfer process. Especially when you consider early versions of STACR (Structured Agency Credit Risk) and CAS (Connecticut Avenue Series) transactions, where they were really designed to move large portions of unexpected loss from the GSEs balance sheet, it makes sense because they were experimenting in the beginning.

Today, the GSEs are a lot better at risk transfer. The products and the markets themselves have started to evolve, and the GSEs are starting to transfer both expected loss and catastrophic loss. The products have evolved and the market players themselves are able to transfer this risk pretty seamlessly. It’s becoming a part of their everyday routine. So at least in the beginning, it seems, they were experimenting and trying to control the entire process.

Now that we have a much better sense of how this works operationally and how credit risk transfer can work both on the back end and the front end, I think we should start focusing on transactions that are scalable and repeatable just as FHFA continues to say they want to do. Also, they should lay the groundwork for a system that is accessible to a majority of market players. It doesn’t make sense to return to a system that advantages some market players over others. Knowing that comprehensive housing finance reform isn’t coming in the near term, we think it’s imperative that FHFA and the GSEs adhere to principles that nearly every industry and consumer group, as well as policy makers, have said are really critical to the housing finance system going forward. They need to begin laying the groundwork now. Those principles are very broad, of course: having greater private capital, which they are very focused on; greater transparency on pricing, and demonstrating the impact to the borrower; and then equitable access for smaller lenders, and lenders of all sizes and types in mortgage finance. So having a greater balance of front-end transactions is something that we are really pushing FHFA and the GSEs to experiment with in 2016.

To read the entire Q&A discussion with USMI president Lindsey Johnson click here