Dr. Mark A. Calabria
Director
Federal Housing Finance Agency
Constitution Center
400 7th Street SW
Washington, DC 20219

Dear Director Calabria:

U.S. Mortgage Insurers (USMI) represents America’s leading providers of private mortgage insurance (MI) and our members are dedicated to a strong housing finance system backed by private capital that enables access to prudent and sustainable mortgage finance. The MI industry has more than 60 years of expertise in underwriting and actively managing mortgage credit risk to balance access to affordable credit with protecting Fannie Mae and Freddie Mac (the GSEs) and the American taxpayer from mortgage credit-related losses. During that time, the MI industry helped more than 33 million households achieve sustainable homeownership, including more than 1.3 million in the past year alone.

On September 22, 2020 the Federal Housing Finance Agency (FHFA) released its “Strategic Plan: Fiscal Years 2021-2024” (Strategic Plan) that establishes goals for FHFA to fulfill its statutory duties as both regulator and conservator of the GSEs. USMI appreciates the opportunity to submit input on the Strategic Plan and provide feedback on the framework and requirements for forthcoming FHFA actions. At a high level, USMI commends FHFA for formalizing the establishment of its new strategic goals to: (1) ensure safe and sound regulated entities through world-class supervision; (2) foster competitive, liquid, efficient, and resilient (CLEAR) national housing finance markets; and (3) position the FHFA as a model of operational excellence by strengthening its workforce and infrastructure. USMI supports these goals and they are consistent with the observations and recommendations outlined in our October 2018 administrative reform report.

A primary goal of the Strategic Plan is to take actions that strengthen the operations and oversight of the GSEs to support their exit from conservatorship. This is consistent with the Administration’s March 2019 “Memorandum on Federal Housing Finance Reform,” which called on the U.S. Department of the Treasury (Treasury) to develop a plan to “End[] the conservatorships of the GSEs upon the completion of specified reforms” and Treasury’s subsequent “Housing Reform Plan” which stated that “In parallel with recapitalizing the GSEs, FHFA should begin the process of ending the GSEs’ conservatorships.” While it will ultimately fall to Congress to complete the difficult work of making permanent and structural changes to the housing finance system, despite a number of legislative proposals over the past 12 years, Congress has yet to pass comprehensive reform. Though congressional action is still needed to provide for the necessary structural reforms, including a transparent and paid-for explicit guarantee of the GSEs’ mortgage-backed securities, the FHFA and Administration can take certain actions to further reduce taxpayer risk exposure, level the playing field, and provide greater transparency regarding GSE pricing and practices—ultimately to put the GSEs and the housing finance system on more stable footing going forward.

Over the summer, the FHFA re-proposed a post-conservatorship capital framework for the GSEs, which you have routinely characterized as the most important rulemaking that will occur during your time as Director. As indicated in our comment letter, USMI urges FHFA to adopt appropriate capital standards for the GSEs and believes that a well calibrated capital framework is a critical reform. However we also strongly believe that additional reforms are necessary, including reforms that reflect the lessons learned during and since the 2008 financial crisis, reduce the GSEs’ duopolistic market dominance, and create long-term safety and soundness in the housing finance system. These reforms, if done correctly, will help to reduce taxpayer risk exposure and ensure that home-ready Americans continue to have sustainable access to prudent mortgage finance credit. Further, actions taken by the FHFA and Administration should help facilitate, not inhibit, Congress’ ability to complete comprehensive housing finance.

As Director of the FHFA, you have previously indicated that the agency “will continue to engage with Treasury to develop a responsible plan to end the conservatorships—with a clear road map and mile markers—and to adjust the Treasury share agreements accordingly.” We are pleased that there are specific “mile markers” and reforms that will have to be met prior to ending the conservatorships of the GSEs. These reforms and mile markers should be met before the GSEs exit conservatorship and are mostly possible if done by the Director of FHFA in his role as conservator. You have stated on a number of occasions your desire and intent to improve competition in the marketplace with the GSEs, noting that “[c]ompetition lowers prices, improves quality, and drives innovation…and ensure[s] no institution is ‘too big to fail.’” However, even if Congress were to provide FHFA the authority to grant charters to new guarantors, for competition to ever exist in the marketplace, the GSEs’ significant market advantages would have to be addressed. Over the decades—and particularly during their more than 12 years in conservatorship—the GSEs have made significant investments in proprietary systems and technologies that have made the mortgage finance system even more reliant on the GSEs. Addressing these vast advantages and implementing these reforms is necessary ahead of allowing the GSEs to build capital and exit conservatorship, where they would otherwise be able to leverage their existing capital and operational advantages to maintain their market dominance.

During conservatorship, stakeholders across the ideological spectrum have put forth a multitude of proposals and recommendations on housing finance reform. While they differ on various details, the proposals and recommendations have a critical similarity among them—they generally recognize that the GSEs should not be recapitalized and released before certain necessary meaningful reforms are completed and made permanent. Further, these proposals also include many common features for what should be considered “mile markers” to be met in advance of ending the net-worth sweep and ahead of the GSEs retaining capital. To varying degrees, many of the leading legislative and Administrative proposals for GSE reform have leaned on a utility-like secondary mortgage market function for the GSEs to reduce their current duopoly and market power in the mortgage finance system. Nearly all such proposals call for capping the GSEs’ rates of return, limiting their scope of activities to secondary market functions, and providing open and transparent access to the GSEs’ data, pricing, and technologies for private market participants, policymakers, and consumers. As to Congress, recent legislative proposals envision a role for the GSEs in a future housing system with an explicit government guarantee at the security level, call for the GSEs to ensure access for smaller lenders, and include transparent affordable housing requirements. These proposals signify that Congress feels there are critical functions currently imbedded in the GSEs and deems these functions/features necessary in a future housing finance system—either within the GSEs or placed in a separate utility or public exchange.

Ultimately, we believe that any actions taken by the Administration should seek to further four key policy objectives: (1) maintain what works in the current system; (2) further reduce taxpayer risk; (3) level the playing field between the GSEs and private market participants; and (4) provide greater transparency regarding the GSEs’ pricing and business practices. At a minimum, prior to the GSEs’ release from conservatorship, USMI urges FHFA to take the following administrative actions to achieve the above stated policy objectives:

1. Limit the GSEs’ activities to only those necessary for the GSEs to fulfill their intended role of facilitating a liquid secondary market for mortgages, preserving a bright line separation between primary and secondary market activities.
   
   Objective 2.1 of the Strategic Plan calls on the FHFA to “ensure the activities of the regulated entities stay within the boundaries of their charters and appropriately respond to market events and downturns.” USMI strongly supports policies and supervision that preserve the “bright line” separation between the primary and secondary mortgage markets. It is imperative that the GSEs’ activities be limited to the secondary mortgage market, as stipulated by their congressional charters which explicitly state that their purposes are to “provide stability in the secondary market for residential mortgages; to respond appropriately to the private capital market; to provide ongoing assistance to the secondary market for residential mortgages…; and to promote access to mortgage credit throughout the Nation.” Before the GSEs are released from conservatorship, FHFA should use its authority to implement regulatory guardrails to ensure the GSEs do not encroach on primary market activities and do not disintermediate private market participants. Infringements of the longstanding bright line serve only to increase the GSEs’ market dominance and diminish the role that private capital plays in the housing finance system. For instance, the selection of loan-level credit enhancement has been a function of the primary mortgage market for more than 60 years and it is critical that it remains as such going forward to ensure that a vibrant, competitive private MI market is maintained to benefit taxpayers and consumers, and to prevent greater entrenchment of the GSEs.
2. Increase transparency around the GSEs’ operations, credit decisioning, technologies, and role in the housing finance system.
   
   Implementing elements of a utility-like secondary market function for the GSEs, including transparency around their data, technology, and pricing, are appropriate guardrails that can help ensure the GSEs’ activities are within the bounds of their charters. Further, initiatives and technologies at the GSEs, such as those that seek to reduce the use of appraisals for purposes of assessing collateral during the underwriting process, can dramatically increase risk in the mortgage finance system if not done with transparency and in collaboration with other market stakeholders. Innovation, without proper guardrails and transparency, can further hardwire the GSEs’ automated underwriting systems (AUSs) into the broader housing finance system and complicate the prospects and logistics of enacting permanent structural reforms.
3. Require a “notice and comment period” process and prior approval of new products and activities.
   
   During their 12 years in conservatorship, the GSEs have developed and introduced programs, products, and pilots with little to no transparency, often representing expansions into areas of the mortgage finance system considered to be functions of the primary mortgage market. This includes pilots for guaranteeing loans for single-family rentals, financing a select group of large non-banks to support mortgage servicing operations, executing lender risk sharing credit risk transfer (CRT) transactions, and utilizing less regulated and capitalized forms of credit enhancement – Fannie Mae’s “Enterprise-Paid Mortgage Insurance” (EPMI) and Freddie Mac’s “Integrated Mortgage Insurance” (IMAGIN). These pilots were introduced into the market without transparency for stakeholders and without a comment period to receive industry input on both the need for the pilots and recommendations to improve their operations. In some cases, they were only made available to a select group of industry participants—generally at the sole discretion of the GSEs, thereby picking winners and losers among industry participants. More recently, FHFA has directed the GSEs to end some of these pilots, and has indicated it plans to release a Request for Input (RFI) or Notice of Proposed Rulemaking (NPR) regarding the prior approval of new products and programs at the GSEs. USMI strongly supports a regulatory mechanism to exercise greater scrutiny of new GSE activities to ensure they support the GSEs’ explicit public policy objectives and comply with their charters. New products, activities, and pilots should only be allowed when there is clear and compelling evidence that the GSEs are needed to fill a market void that the private market cannot meet. A robust approval process that complies with the Administrative Procedure Act (APA) and provides for input from market participants and stakeholders will help ensure that private capital plays a significant role in the mortgage market and prevent the GSEs from being further entrenched in the housing finance system.
4. Require that counterparty standards be set by the FHFA.
   
   Objective 2.1 of the Strategic Plan also calls on the FHFA to “establish standards for sellers, servicers, and counterparties to the regulated entities that strengthen the overall function and resiliency of the mortgage markets.” Private MIs are one of the only counterparties that have rigorous capital and operational standards, the Private Mortgage Insurer Eligibility Requirements (PMIERs), set by the GSEs and approved by FHFA, which were finalized through a public comment process. MIs must comply with the PMIERs standards in order to insure loans guaranteed by the GSEs. PMIERs ensure MI counterparty creditworthiness, as well as providing minimum standards for capital, operations, procedures, conflicts of interest, and other controls. USMI supports the FHFA promulgating strong risk-based capital and operational standards for all credit enhancement providers to ensure the availability of first-loss, loan-level credit enhancement across market cycles.
   
   The Administration has an opportunity to promote greater transparency and oversight of the GSEs and their counterparties and to correct what has proven to be at times a conflicting role that the GSEs play by both setting standards for market participants and then competing against these same private market participants. Lenders and other market participants should feel confident that they can access the secondary market on a level playing field with their competitors, based on clear and transparent standards. While diminished under a more utility-like system, there will still be a conflict for the GSEs to set counterparty standards, as there will continue to be opportunities to arbitrage the rules to compete with the private market and/or to pick winners and losers in the marketplace. A further post-conservatorship complication is that the GSEs may not continue to collaborate on PMIERs updates and the existence of two competing eligibility standards could cause market arbitrage opportunities and market distortions. Therefore, FHFA, under its authority and responsibility as regulator, should remain intently engaged in the development and approval of PMIERs. It is also important that the FHFA create transparent and consistent/comparable standards that promote a level playing field across counterparties.
   
   Further, consistent with nearly all other federal financial regulatory regimes, the FHFA as a prudential regulator of the GSEs should supervise the GSEs’ risk management processes and financial health. FHFA should use its regulatory authority whenever possible (as opposed to its authority as conservator) to minimize regulatory arbitrage by having a coordinated and consistent oversight approach.
5. Promote a clear, consistent, and coordinated housing finance system.
   
   Finally, actions taken by FHFA should increase transparency and consistency, and should reduce, not merely shift, mortgage credit risk in the housing finance system. To accomplish this, the FHFA should work closely with other federal regulators to implement a transparent and coordinated housing policy that facilitates access to credit, promotes prudent mortgage underwriting, and creates a level playing field. Robust coordination between the FHFA, U.S. Department of Housing and Urban Development (HUD), and Consumer Financial Protection Bureau (CFPB) will ensure that borrowers are best served by housing market participants and that the federal government, and therefore American taxpayers, are adequately protected from losses related to mortgage credit risk. Federal policy should clarify which borrowers should be served by the GSE backed market and which are better served by the Federal Housing Administration (FHA). This is consistent with Treasury’s “Housing Reform Plan, which stated that “FHFA and HUD should develop and implement a specific understanding consistent with these defined roles for the GSEs and the FHA so as to avoid duplication of Government support.” Importantly, the GSEs have demonstrated that first-time homebuyers and borrowers with low down payments can effectively be supported by the conventional market. The GSEs and MIs have a long history of facilitating access to affordable and prudently unwritten low down payment mortgages, and conventional loans with private MI have been the preferred option for low down payment borrowers for every year since 2016. These home-ready borrowers should have mortgage options and not be categorically restricted to government-insured programs such as the FHA.
   
   A primary aspect of promoting a coordinated housing finance system is that the Administration, and FHFA specifically, should advance policies that promote borrowers being served by the conventional market, by private capital, where possible. As stated in our comment letter on the re-proposed Enterprise Regulatory Capital Framework, USMI strongly encourages FHFA to promote private capital standing in front of the GSEs, including through loan-level first-loss protection through entities that can actively manage mortgage credit risk, such as private MIs. Further, the Administration could encourage or require these private entities to disperse credit risk, similar to how private MIs currently operate and use the reinsurance and capital markets to further distribute mortgage credit risk to diverse global sources of capital.

A well-functioning housing finance system should provide consistent, affordable credit to borrowers across the nation and through all parts of the credit cycle without putting taxpayers at undue risk. Fixing our nation’s housing finance system and putting it on a sustainable path is the last piece of unfinished business following the 2008 financial crisis. We urge the FHFA and Administration to pursue the reforms enumerated above to ensure greater taxpayer protection and a more level playing field that enables a more transparent housing finance system and promotes sustainable access and affordability.

Sincerely,

Lindsey D. Johnson
President
U.S. Mortgage Insurers

View the letter as a PDF.

The Honorable Kathleen Kraninger
Director
Consumer Financial Protection Bureau
1700 G Street NW
Washington, DC 20052

Re: Qualified Mortgage Definition under the Truth in Lending Act (Regulation Z): General QM Loan Definition, Docket No. CFPB 2020-0020

Dear Director Kraninger:

U.S. Mortgage Insurers (USMI)1 represents America’s leading providers of private mortgage insurance (MI). Our members are dedicated to a strong housing finance system backed by private capital that enables access to prudent and sustainable mortgage finance for borrowers, while also protecting Fannie Mae and Freddie Mac (the GSEs) and the American taxpayer from mortgage credit-related losses. The MI industry has more than six decades of expertise in underwriting and actively managing mortgage credit risk. Our member companies are uniquely qualified to provide insights on federal policies concerning underwriting standards for the conventional mortgage market, especially given our experience balancing prudent underwriting with access to affordable credit.

USMI appreciates the opportunity to comment on the Consumer Financial Protection Bureau’s (Bureau) NNotice of Proposed Rulemaking (NPR)2 regarding changes to the General Qualified Mortgage (QM) definition. Done right, a revised General QM definition will promote prudent underwriting that enables home-ready borrowers to receive fairly priced and affordable conventional mortgages. USMI and other housing finance stakeholders recognize that changes to the General QM definition will broadly inform underwriting standards and practices across the mortgage market. As discussed below, we are concerned that, as contemplated, the proposed rule could limit access to the conventional market for the very borrowers that have traditionally been underserved.

In our comments below, USMI will discuss the following observations and recommendations:

1. The Safe Harbor should be set at 200 basis points (bps) above the Average Prime Offer Rate (APOR) to ensure that the General QM definition does not inadvertently limit access to credit for home-ready borrowers, and particularly minority borrowers.
2. As part of the requirements for “consider and verify,” the Bureau’s final rule should preserve robust and measurable underwriting standards and practices that have been proven to balance access to credit and prudent mortgage underwriting standards.
3. It is critical that the Bureau work closely with federal regulators to implement a transparent and coordinated housing policy that promotes access to credit, prudent mortgage underwriting, and creates a level playing field.
4. The Bureau should reconsider its approach to adjustable-rate mortgages (ARMs) and amend the NPR to exclude five-year ARM products from the proposed treatment of short-reset ARMs.
5. USMI agrees with the Bureau’s assessment that a hard 43% debt-to-income (DTI) ratio cap would be the most harmful option for the General QM definition because it would severely limit access to credit in the conventional market. Consistent with our comment letter dated September 16, 2019 in response to the Bureau’s Advance Notice of Proposed Rulemaking on the QM Definition, we continue to believe that the best approach to a General QM definition would be a standard that includes a higher DTI threshold with specified compensating factors. Please see Appendix A for additional information about a General QM definition that retains a DTI limit.

Overview of QM Definition or the Conventional Market

2013 ATR/QM Rule
Street Reform and Consumer Protection Act (Dodd-Frank)4 that created specific mortgage product restrictions and required the Bureau to promulgate the Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule). The Bureau’s final ATR/QM Rule – issued in June 2013 and made effective on January 10, 2014 – created a General QM category with a 43% DTI limit and requirements concerning product features and points and fees, as well as a temporary QM category for mortgages that met statutory limitations on product features and points and fees and are eligible for purchase by Fannie Mae or Freddie Mac. This temporary QM category has become known as the “GSE Patch,” and the 2013 final rule stipulated that the GSE Patch would sunset the earlier of: (1) the GSEs exiting conservatorship; or (2) January 10, 2021. The GSE Patch has served its intended purpose of maintaining credit availability in the conventional mortgage market and CoreLogic estimates that approximately 16% of 2018 mortgage originations ($260 billion) were made as QM loans by virtue of the GSE Patch. We note that, under the Patch, QM loans have included mortgages with DTI ratios up to 50% with compensating factors.

The Dodd-Frank Act went beyond previous federal consumer protection laws that were largely intended to root out predatory, subprime mortgage products, including the Home Ownership and Equity Protection Act (HOEPA) that defined a class of “higher priced mortgage loans” (HPMLs). HOEPA was later expanded in 2001 and 2008 to provide for a presumed violation of the law when a lender engaged in a pattern of originating higher-priced mortgages without verifying and documenting the borrower’s ATR. Dodd-Frank went beyond HPMLs to address concerns about mortgage underwriting practices by creating specific mortgage product restrictions and requiring the CFPB to promulgate a rule defining “Qualified Mortgage” based on specific underwriting criteria. As promulgated in the 2013 final rule, QM and Safe Harbor were determined by two separate measures: QM status was based on product and underwriting requirements; and Safe Harbor was based on loan pricing. Given that distinction, the different standards made a certain amount of sense. Under the 2020 proposed rule, however, QM status and Safe Harbor are measured using the same metric – price – so there is no longer any reason to set those standards at different spread amounts. As further discussed below, and as the Bureau validates based on early delinquency data, this spread threshold should be set at 200 bps above APOR.

2020 NPR
The NPR would remove the 43% DTI limit and instead grant QM status to a mortgage “only if the annual percentage rate (APR) exceeds [the] APOR for a comparable transaction by less than two percentage points as of the date the interest rate is set.” Although the NPR recommends establishing the pricing threshold for defining QM loans at an APR spread of 200 bps over APOR, it also preserves the APR spread over APOR of 150 bps to distinguish between Safe Harbor and Rebuttable Presumption QM loans.

QM Safe Harbor Threshold Should be Increased to APOR Plus 200 bps

Safe Harbor Threshold Will Determine the Conventional Mortgage Market
If the final General QM rule maintains a pricing-based QM, the Bureau should increase the spread that is used to delineate Safe Harbor loans and Rebuttable Presumption loans from 150 bps to 200 bps over APOR. This would not only align the delineation with the APOR threshold that the Bureau recommends using to determine QM status, but would also broaden access to the conventional QM market for more home-ready borrowers and create a more level and coordinated housing finance system across the government and conventional mortgage markets.

Determining the Safe Harbor threshold impacts the makeup for the conventional market and who it will be able to serve under a new General QM definition because so few Rebuttable Presumption mortgages have been originated in the conventional market since the final QM rule was implemented in 2014. This is because mortgage lenders have sought to minimize their legal risk by almost exclusively originating QM Safe Harbor loans, thus effectively making the Safe Harbor threshold the standard for QM loans. Home Mortgage Disclosure Act (HMDA) data shows that only 4.6% of purchase QM conventional mortgages and 2.5% of refinance QM conventional mortgages from 2019 were above the APOR plus 150 bps Safe Harbor threshold. However, this data should not be mistakenly interpreted as an indication that there is not a market interest in safely lending above this threshold. In fact, lenders are willing to make loans with pricing above 150 bps when those loans have Safe Harbor status, as evidenced by the fact that loans insured by the Federal Housing Administration (FHA) are five times more likely to be originated with spreads above 150 bps than conventional market loans because the FHA Safe Harbor delineation is set at close to 200 bps. It is also important to look at the performance of loans with higher spreads. Historical GSE 60 plus days delinquency data underscores that loans with spreads up to 200 bps above APOR have performed well, are sustainable mortgages that have been made to creditworthy borrowers, and should qualify for QM Safe Harbor treatment.

Minority Borrowers are Denied Greater Choice and Access to Credit as a Result of a Safe Harbor Threshold at 150 bps Above APOR
Failure to increase the QM Safe Harbor threshold to 200 bps above APOR misaligns the Safe Harbor definition across the government and conventional mortgage markets and results in the same mortgage being a QM Safe Harbor in one channel, but merely a Rebuttable Presumption QM in another, effectively denying that borrower true choice in lenders and mortgage products. This impact is particularly acute for minority borrowers who overwhelmingly rely on low down payment mortgages to purchase their homes. According to 2019 HMDA data for conventional low down payment purchase mortgages (>80% loan-to-value or LTV), Black and Hispanic borrowers were twice as likely as White borrowers to have mortgages with APRs in excess of the APOR plus 150 bps Safe Harbor spread.

Market Impact from the Calculations for the APOR Spread
As discussed below, the different method for calculating the APOR spread for FHA loans results in loans qualifying for FHA QM Safe Harbor status that would merely qualify for Rebuttable Presumption status in the conventional market. As seen in the chart below, FHA loans are six times more likely to have pricing spreads greater than 150 bps above APOR than conventional loans. In 2019, only 7% of high LTV conventional purchase mortgages were above the APOR plus 150 bps Safe Harbor threshold (representing approximately 82,000 borrowers and $23 billion in origination volume) while 38% of FHA’s high LTV purchase mortgages were above the threshold (representing approximately 252,000 borrowers and $63 billion in origination volume).

The de minimis amount of QM Rebuttable Presumption lending in the conventional market strongly suggests that borrowers – most of whom are minorities – with loan spreads above the proposed APOR plus 150 bps threshold would likely have no real choice other than loans insured by the FHA, because their lenders will only want to originate Safe Harbor loans. To underscore this significant reduction in competition, consider that for 2019 there were nearly three times the number of HMDA reporting
lenders for conventional purchase loans than FHA purchase loans (approximately 3,200 versus 1,200).

Safe Harbor at APOR Plus 200 bps Results in Safe, Sustainable Mortgages
The NPR proposes a pricing threshold to determine whether a loan is a QM and sets the threshold at an APR of up to 200 bps above APOR. The Bureau justifies this threshold using early delinquency data as an indicator of determining consumers’ ATR. The NPR specifically states that “…the Bureau tentatively concludes that this threshold would strike an appropriate balance between ensuring that loans receiving QM status may be presumed to comply with the ATR provisions and ensuring that access to responsible, affordable mortgage credit remains available to consumers” (emphasis added). The proposed QM threshold is predicated on the Bureau’s analysis of early delinquency levels and historical GSE data on 60 plus days delinquent rates demonstrates that increasing the QM Safe Harbor threshold from 150 bps to 200 bps above APOR does not result in a significant deterioration in loan performance that would warrant a different and highly impactful legal characterization. While delinquency is correlated with rate spread, the graph below shows a minimal increase in delinquency rates, especially for the 2013-2018 vintages, which reflect post-crisis enhanced underwriting standards as a result of Dodd-Frank, subsequent rulemakings, and improved lender practices and technologies. This cohort of originations is most indicative of future loan quality and proves that setting the QM Safe Harbor at 200 bps above APOR does not materially increase risk in the system but does indeed expand access to conventional mortgage credit.

Safe Harbor at APOR Plus 150 bps Creates an Unlevel Playing Field Where Lending is Dictated by Regulatory Standards rather than Borrower Credit Profile
Dodd-Frank required the Bureau, U.S. Department of Housing and Urban Developments, U.S. Department of Veterans Affairs, and the Rural Housing Service to create their own QM definitions, including delineating between Safe Harbor and Rebuttable Presumption. The result is a patchwork of standards based on which entity purchases, insures, or guarantees a mortgage loan. In the case of loans insured by the FHA, the delineation between Safe Harbor and Rebuttable Presumption is calculated differently than for conventional loans. This difference has resulted in lenders being much more willing to originate FHA-insured loans with spreads above APOR plus 150 bps because FHA uses a “floating standard” to calculate Safe Harbor that is not impacted by the amount of FHA premium charged. Based on the current FHA Annual Mortgage Insurance Premium (MIP), the FHA QM Safe Harbor is effectively APOR plus 200 bps. As a result, USMI’s recommendation would effectively create a level playing field between FHA and conventional standards for Safe Harbor QMs.

The table below demonstrates how, under the NPR, two loans with identical loan terms and credit characteristics would both be considered QM under the conventional and FHA standards. However, the FHA-insured mortgage would have Safe Harbor status, while the conventional mortgage would merely receive Rebuttable Presumption status. This highlights the current regulatory imbalance that results in many borrowers effectively having no choice on mortgage products because of lenders’ unwillingness to originate Rebuttable Presumption loans.

Another critical difference between the FHA and conventional market calculations is how fees charged by the GSEs and the Government National Mortgage Association (Ginnie Mae) for guaranteeing mortgages affect a loan’s pricing. Unlike the GSEs, Ginnie Mae does not charge risk-based loan-level price adjustments (LLPAs) that factor into a loan’s APR. While the GSEs’ guarantee fees (G-Fees) are in some part based on the attributes of a specific borrower and property, G-Fees and LLPAs also can be –and are – used by the GSEs, Federal Housing Finance Agency (FHFA), and other federal policymakers to accomplish specific public policy or credit risk management goals that can be wholly separate from the credit risk associated with a particular mortgage loan. Further, pricing changes, such as the impact of a finalized rule on GSE capital requirements, adverse market fees based on market developments, or the implementation of new accounting standards have the potential to create temporary credit contractions due to the lag in APOR factoring in new GSE fees and a period of time where APOR is not truly reflective of the mortgage market.

The impact of LLPAs and G-Fees on a conventional loan’s APR could be further magnified by the GSE capital rule that the FHFA recently re-proposed. USMI urges the Bureau and FHFA to study the intersection of these two rulemakings before finalizing either. To the extent that the final capital rule would result in higher G-Fees and/or LLPAs to meet market expectations for a reasonable return on equity (ROE), given the materially higher capital called for under the re-proposed rule, those fees would result in higher APRs and spreads over APOR that could deny a loan Safe Harbor status. USMI urges the Bureau to work with FHFA to ensure clarity and transparency with regard to how the proposed capital requirements could impact the QM Safe Harbor determination.

Implementation of a “Consider and Verify” Standard and Elimination of Appendix Q
With the removal of the 43% DTI limit and Appendix Q from the General QM loan definition, an important element of the NPR is the requirement that a lender “consider and verify” a borrower’s income, assets and debt obligations, as well as provides a compliance safe harbor for the use of Bureau approved external standards. USMI continues to have concerns with a QM standard that relies only on the limited Dodd-Frank product restrictions without any other standards or bright line thresholds that would ensure a borrower has a true ATR. The proposed “consider” requirement is especially subjective and the NPR does not currently include specific standards that a lender must meet in order to satisfy this element of the QM definition. In order to provide clarity to market participants, the final rule should identify specific requirements or best practices to be used by lenders to qualify for the “consider and verify” compliance safe harbor. While under the proposed approach in the NPR a specific DTI threshold would be removed from the General QM definition, we think that a properly crafted standard for “consider and verify” could function to encourage the kind of robust underwriting that is needed to assess a borrower’s ATR. For example, one way in which a creditor might document how it “considered” a loan with an elevated DTI would be to use a specific set of underwriting criteria, including compensating factors for consumers with elevated DTIs as recommended in USMI’s 2019 comment letter. Such an approach would be more consistent with the intent of a General QM definition that includes underwriting guardrails and would better ensure creditors appropriately consider critical elements in assessing and ensuring a borrower’s ATR. Further, a set of transparent compensating factors would provide for great consistency across government and conventional mortgage markets and would be more meaningful for considering and determining a borrower’s ATR.

Also related to the “consider and verify” standard, USMI supports the NPR’s proposal to eliminate the requirement that mortgage lenders use Appendix Q to calculate a borrower’s income and debt obligations and to allow other forms of documenting and verifying income, assets, and debt. Widely understood, accessible, and trusted standards for determining income and debt are critical for consistent and prudent mortgage underwriting. However, the static nature of Appendix Q has proven problematic, especially as financial technology (fintech) and workforce trends continue to evolve. By eliminating Appendix Q, the Bureau opens the door to the use of more flexible and dynamic standards and processes for calculating income and debt, which is especially important for creditworthy borrowers with non-traditional forms of income who would be disadvantaged should lenders be required to use Appendix Q.

The NPR notes that lenders would have the flexibility to develop their own income and debt verification standards or could rely on “verification standards the Bureau specifies,” which potentially includes the following: Fannie Mae’s Single Family Selling Guide; Freddie Mac’s Single-Family Seller/Servicer Guide; FHA’s Single Family Housing Policy Handbook; the VA’s Lenders Handbook; and the Field Office Handbook for the Direct Single Family Housing Program, and the Handbook for the Single Family Guaranteed Loan Program of the U.S. Department of Agriculture (USDA).23 These guides and the standards contained within are widely understood by mortgage market participants and, unlike federal regulations, can be, and are, easily revised to account for housing market or broader economic developments or fintech innovation. In the final rule, the Bureau should detail a transparent process by which it will evaluate, approve, and supervise verification standards developed by individual market participants or through a collaborative entity, such as an industry self-regulatory organization.

Notwithstanding the elimination of underwriting thresholds in the General QM definition, in the low down payment segment of the conventional market, MI companies will continue to apply and rely on their underwriting guidelines to assess individual borrowers for purposes of determining ATR and overall creditworthiness. The MI industry’s underwriting guidelines and role as “second pairs of eyes” have proven beneficial with identifying credit risk trends, most notably risk layering and ensuring prudent conventional mortgages.

Regulatory Alignment
Realizing this rulemaking’s impact on the size of the conventional market and its underwriting guardrails, it is critical to highlight the historical link between the QM definition and the Credit Risk Retention Rule, which includes an exemption from the five percent retention requirement for assetbacked securities collateralized exclusively by mortgages that are deemed “qualified residential mortgages” (QRMs). Due to the two standards being linked by statute and the requirement that QRM be “no broader than” the definition for QM, the promulgating agencies established a QRM framework that fully aligns with QM. The housing finance system has functioned well under this alignment which has enhanced financial stability, protected investors, promoted compliance, and preserved consumers’ access to affordable credit. The promulgating agencies announced that they would postpone consideration of changes to the QRM standard until June 2021 to factor in any changes to the QM definition. USMI urges housing and financial regulators to preserve the full alignment between the QM and QRM standards in order to preserve current housing market functions and processes.

It is critical that housing finance regulators, including the Bureau, FHFA, and FHA, have a transparent and coordinated approach to the federal government’s housing policy. In addition to preserving the alignment between the QM and QRM standards, USMI urges the Bureau to work closely with the FHFA on the implications for QM due to its proposed GSE capital rule, and with the FHA to align QM standards. Robust coordination will ensure that borrowers are best served by housing market participants and that the federal government, and therefore taxpayers, are adequately protected from losses related to mortgage credit risk.

Treatment of Adjustable-Rate Mortgages
The NPR would modify the assessment of ARMs for purposes of determining QM status, such that lenders “must treat the maximum interest rate that could apply at any time during [the] five-year period [after the date on which the first regular periodic payment will be due] as the interest rate for the full term of the loan to determine the annual percentage rate.” This provision would likely reduce the availability of three- and five-year ARM products in the conventional mortgage market. USMI believes that this element of the NPR should be reconsidered and amended to exclude five-year ARM products from the proposed treatment of short-reset ARMs. Based on internal analysis of the performance for five-year ARM products, USMI member company data demonstrates that ≥5-year ARM performance is in line with, or better than, >20-year fixed-rate mortgages. Further, private MIs’ guidelines treat five year ARMs as a “fixed-rate mortgage” based on historical performance.

Implementation of the New General QM Definition
The NPR indicates that a new General QM definition will likely not take effect before April 1, 2021, based on the Bureau’s determination that “a six-month period between Federal Register publication of a final rule and the final rule’s effective date would give creditors enough time to bring their systems into compliance with the revised regulations.” The Bureau has also proposed that the GSE Patch expire no earlier than: (1) the GSEs exiting conservatorship; or (2) the effective date of the General QM final rule.
As explained in our comment letter on the Bureau’s proposed rule regarding the sunset of the GSE Patch, it is critical that the Bureau provide for a smooth transition from the GSE Patch to the new General QM definition.

Depending on the complexity of the finalized revisions to the General QM definition, the significance of the penalties for a violation of the ATR/QM Rule, and the large number of mortgage industry participants (lenders, brokers, MIs, warehouse lenders, etc.) that will need to update their operations and systems, USMI recommends that the Bureau set the sunset date for the GSE Patch to be at least six months after the effective date of the General QM definition final rule. During this six-month period, lenders should be permitted to use either the GSE Patch or the new General QM definition during the
mortgage underwriting process, such that a loan meeting either standard would qualify as a QM. This would afford industry participants an appropriate amount of time to develop, test, and implement new models and business operations in order to smoothly transition to the new General QM framework. More specifically, the six-month overlap period would fix the regulatory gap caused by using the mortgage consummation date for the GSE Patch and the loan application date for the proposed General QM definition.

Further, mortgage market participants, consumers, and the economy as a whole are grappling with an unprecedented level of uncertainty due to the COVID-19 pandemic. The mortgage industry is working diligently to support homeowners directly and indirectly affected by COVID-19, especially through the implementation of broad nationwide mortgage relief for homeowners following the enactment of the “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act). Given the extensive scope of the
pandemic and the financial services industry’s appropriate focus on responding to the economic and health fallout from COVID-19, USMI believes that a six-month overlap period would promote an orderly implementation timeframe for the new General QM framework while continuing to assist homeowners
throughout the country.

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Thank you again for the opportunity to comment on the proposed General QM definition and your consideration of our recommendations to best balance prudent mortgage underwriting and credit risk management with borrower access to mortgage finance credit. USMI and our member companies appreciate the Bureau’s thorough review of this very important issue and we look forward to continued dialogue as the Bureau proceeds with finalizing and implementing a new General QM definition.

Sincerely,

Lindsey D. Johnson
President
U.S. Mortgage Insurers

View the letter as a PDF.

On June 30, 2020, the Federal Housing Finance Agency (FHFA) published a Notice of Proposed Rulemaking (NPR) on the Enterprise Regulatory Capital Framework (ERCF).  On August 31, USMI submitted comments to the NPR, emphasizing the importance of constructing a balanced, transparent, and analytically justified framework. USMI’s full comments can be found here and an executive summary can be found here. In 2018, FHFA issued a prior proposal for changing the risk-based capital framework for the GSEs.  USMI also submitted a comment letter, which can be found here.

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