Tag: credit risk transfer

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

Posted on by Rhina Portillo

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

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

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

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

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U.S. Mortgage Insurers (USMI) is dedicated to a housing finance system backed by private capital that enables access to housing finance for borrowers while protecting taxpayers. Mortgage insurance offers an effective way to make mortgage credit available to more people. USMI is ready to help build the future of homeownership. Learn more at www.usmi.org.

Newsletter: December 2019

Posted on by Rhina Portillo

Here is a roundup of news surrounding recent developments in President-elect Donald Trump’s housing policy, key legislative proposals and also reports on the benefits of front-end credit risk sharing with deep cover mortgage insurance, and a new USMI blog post on unnecessary upfront risk fees (loan-level price adjustments) imposed by Fannie Mae and Freddie Mac:

  • Nominee for Secretary of Housing and Urban Development Announced. Earlier this week, President-elect Donald Trump announced that he would nominate Dr. Ben Carson as his Secretary of Housing and Urban Development.
  • GSE Credit Risk Transfer Legislation Introduced in Congress. HousingWire and American Banker report that on December 8 Reps. Ed Royce (R-Calif.) and Gwen Moore (D-Wisc.) introduced a new bill in the House of Representatives that would require the GSEs to offload more credit risk onto the private sector. The Taxpayer Protections and Market Access for Mortgage Finance Act of 2016 (H.R. 6487) seeks to require Fannie Mae and Freddie Mac (GSEs) to transfer more credit risk through front-end credit risk transfer (CRT) transactions to mitigate losses and risks to taxpayers and the federal government. In addition to other provisions, H.R. 6487 calls for a five-year pilot program to increase the amount of risk transferred away from the government before it reaches the GSEs’ balance sheets by using front-end CRT with private mortgage insurance (MI). This front-end MI-based CRT method is consistent with recommendations to the Federal Housing Finance Agency (FHFA) from USMI and others, and builds upon the current, effective use of private mortgage insurance in the GSE system that has been in practice for decades.
  • Treasury Secretary Nominee Calls for GSEs to Exit Conservatorship. In recent comments, President-elect Donald Trump’s nominee for Treasury Secretary, Steve Mnuchin, called for the GSEs to exit conservatorship, adding that government ownership of the companies displaces private capital in the housing finance system and that the Trump administration “will get it done reasonably fast.” President-elect Trump’s transition team noted that the need to structurally reform the GSEs has bipartisan agreement.
  • Housing Expert Extols Benefits of Front-End Credit Risk Transfer and Deeper Cover Mortgage Insurance. In a recent article, Faith Schwartz, a housing finance policy expert who has worked extensively with the federal government in the US housing market, wrote on the benefits of front-end credit risk transfer (CRT), including through the use of deeper cover mortgage insurance (MI). Schwartz notes that front-end CRT and deeper cover MI allow for greater transparency, more options in a counter-cyclical volatile market, inclusive institutional partners and borrower process, and allows the GSEs to reach their goals in de-risking their credit guarantee. Schwartz concludes her article by saying: “In summary, whether it is recourse to a lending institution or participation in the front-end MI cost structure, pricing this risk at origination will continue to bring forward price discovery and transparency. This means the consumer and lender will be closer to the true credit costs of origination. With experience pricing and executing on CRT, it may become clearer where the differential cost of credit lies. The additional impact of driving more front-end CRT will be scalability and less process on the back-end for the GSE’s. By leveraging the front-end model, GSE’s will reach more borrowers and utilize a wider array of lending partners through this process.”
  • Consumer and Civil Rights Groups Raise Concerns about LLPAs. The MReport writes that 21 groups sent a letter to FHFA Director Mel Watt and Treasury Secretary Jack Lew on December 8 “expressing concern that too many creditworthy low- and moderate-income borrowers are being denied access to mortgage credit.” These groups state that “The increase in the Enterprises’ guarantee fees and risk-based pricing (LLPAs) has had a number of effects to varying degrees that some predicted, including more banks are holding fixed-rate loans on portfolio, more financing of lower-credit score borrowers by the Federal Housing Administration, and fewer originations to the underserved overall.”
  • ICYMI: Lindsey Johnson writes on Loan-Level Price Adjustments (LLPAs). In a new blog post, USMI President Lindsey Johnson highlights the need for the reduction or elimination of upfront risk fees (LLPAs) based on a borrower’s credit score and down payment. In the blog, Johnson explains how this risk is already protected by private mortgage insurance, paid for by the homeowner. LLPAs, which were put in place in 2008, are increasingly unnecessary following the enactment of stronger underwriting standards for privately insured mortgages and in essence double charge a borrower for the same risk. Johnson encourages the FHFA and the GSEs to continue to work to manage risk, however LLPAs have become arbitrary fees that make homeownership more expensive or puts homeownership out of reach for many middle and lower income homebuyers. USMI was part of a group of 25 organizations that wrote a letter to FHFA Director Mel Watt in June calling for FHFA and the GSEs to reduce to eliminate LLPAs.

Blog: 2017: An Opportunity to Coordinate America’s Housing Policy

Posted on by Lindsey Johnson

By Lindsey Johnson

While the housing finance system in the United States has developed into an ad hoc set of entities and programs, so has the regulatory system around it with more than seven[i] federal agencies playing a role in the formation of policy and regulation of activities for housing finance. Despite the expansive reach of the federal government in the housing finance system and the exhaustive list of government agencies regulating it, safety and soundness gaps exist, access to credit remains tight, and potential homeowners continue to fall through the cracks. Housing policy has become political in addition to being complex and has therefore created an environment where meaningful reforms are rarely achieved. However, the outcome of the historic 2016 election means that one party will control all three branches of government starting in 2017, which presents a unique opportunity to examine the underpinnings of the housing finance system and establish a more comprehensive and coordinated approach to housing policy, rather than just tinkering around the edges of the mortgage finance industry.

Here are three overarching housing considerations and recommendations for the new Congress and Administration:

  1. There is a need for more coordinated, comprehensive, and transparent federal housing policy.
  2. All attempts to reform the housing finance system should fix the parts of the system that were and are broken, while enhancing the parts of the system that work. Part of the solution to fix what is broken is to identify and address areas of inconsistency and redundancy.
  3. Private capital should play a much greater role in the housing finance system. There should be a regulatory body that sets safety and reliability rules for market players on an equitable basis. Further private capital, not government and taxpayers support, should be encouraged to provide access to credit and protect against credit risk where possible in the housing finance system.

Since major housing policy tends to be reactionary and seldom comprehensive, inconsistencies and overlaps have developed resulting in dramatic shifts between the completely private market (PLS market), the semi-government backed market (conventional market via Fannie Mae and Freddie Mac), and the fully government-backed Ginnie Mae market (FHA, VA, and USDA). One such area of inconsistency is in low downpayment lending, which is increasing as a proportion of the overall residential mortgage market. Currently, a single borrower is subject to different requirements and pays different premium rates for insurance or a guarantee on a low downpayment loan under private mortgage insurance (MI), the FHA, the USDA’s Rural Housing Service, the Department of Veterans Affairs, or state Housing Finance Agency programs—even though the borrower’s risk profile remains the same.

A coordinated policy would inform how low downpayment lending in the U.S. is carried out. For example, it is common in other types of insurance such as crop, flood and terrorism insurance, to limit government programs to higher risk borrowers or to condition access to supplemental capacity by requiring some demonstration of the need for that capacity. The FHA’s current loan limits do not provide a level playing field nor is there a direct preference for a private capital alternative.  Instead, any preference is done indirectly through premium rate setting and competition, which results in an unstable policy environment. The resulting outcome is dramatic fluctuations between these mortgage finance markets, which at times is most evident between the private mortgage insurance market and the 100% government-backed mortgage insurance market at FHA. While it may seem normal to have some fluctuations during different housing cycles, the recent market fluctuations have most often been the result of competition for market share between the two. This is neither conducive for the most efficient and effective mortgage finance market nor does it ensure that borrowers are being best served. Furthermore, there are redundancies and significant overlap between several government agencies such as FHA and the Rural Housing Service (RHS), where on repeated occasions the GAO[ii] and others have suggested consolidating the agencies or at least specific areas of intersection between them.

Of course a true comprehensive, coordinated housing policy will require reform of the GSEs—or as previously stated, fixing the parts of the housing finance system that were and are broken while enhancing the parts of the system that work. Although housing finance reform may not be the first focus of the new Congress and Administration, significant steps could be taken in the near-term to encourage greater reliance of private capital and market discipline in the housing finance system by establishing clarity about the roles of the different agencies in facilitating homeownership and by providing much greater transparency at both FHA and the GSEs about how these agencies price credit risk. Again, this difference between agencies is particularly sharp in the case of FHA and the conventional lending space with Fannie Mae and Freddie Mac, which use private capital, such as private MI, to insure against a portion of first-loss on high LTV loans. However, in this case, a single borrower either pays a premium rate determined on an average basis (FHA) or a risk-based one (private MI), with the risk-based premium driven by “asset requirements” established by the government-guaranteed GSEs but not by the government-guaranteed FHA. So while there continues to be bipartisan support for reducing the government’s footprint and reducing taxpayers’ exposure to mortgage credit risk, the current market’s inconsistencies are considerable roadblocks to achieving that goal.

There are a number of different proposals for reforming the housing finance system, but most essential going forward is that Congress fixes one of the greatest flaws of the previous and current system, namely that government-backed entities – whether completely government controlled such as FHA or quasi-government such as the GSEs – should not set rules for and then compete on an unlevel playing field with the private market. These entities should perform explicit functions that foster greater participation by the private market, should promote a race-to-the top and not a race-to-the-bottom, and should be highly regulated. They should also be completely transparent in the credit risk they guarantee and how they price that credit risk. Transparency about how government prices credit risk would facilitate the greatest level of liquidity in these markets, and for credit risk transfer would foster an understanding of how these transactions are priced and the best execution for each. Finally, providing greater transparency will help end a structure where only a few agencies control the housing finance system because of their ownership of proprietary data, systems, and pricing. In conservatorship, the GSEs have an explicit guarantee on their Mortgage Backed Securities from the federal government. Therefore, until comprehensive housing finance reform is realized, critical steps could be taken now to improve transparency and foster greater understanding by market participants that will ultimately better inform borrowers. More transparent pricing will benefit lenders, investors, and most of all consumers and taxpayers.

As stated by former FHFA Director Ed DeMarco, housing finance reform “remains the great unfinished business from the Great Recession.” The complexity and political nature of the issues surrounding housing finance reform make it a daunting task to be sure, but the new Administration and Congress have a unique opportunity to make the housing finance system more coordinated, transparent, and disciplined to work for taxpayers and borrowers.

[i] Federal agencies involved with housing finance policy and regulation include FHFA, HUD, VA, USDA, Treasury, NCUA, and CFPB

[ii] U.S. Government Accountability Office, HOME MORTGAGE GUARANTEES: Issues to Consider in Evaluating Opportunities to Consolidate Two Overlapping Single-Family Programs (September 29, 2016).  See http://www.gao.gov/assets/690/680151.pdf.

Statement: FHA’s Annual Report to Congress

Posted on by dcadmin

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For Immediate Release             

Media Contact: Dan Knight

202-777-3544

media@usmi.org

USMI Statement on FHA’s Annual Report to Congress

WASHINGTON — Today, the Federal Housing Administration (FHA) released its “Annual Report to Congress Regarding the Financial Status of the Mutual Mortgage Insurance Fund (MMIF) Fiscal Year 2016.” The following statement can be attributed to Lindsey Johnson, USMI President and Executive Director:

“Consistent with improvement in the overall mortgage credit market, we welcome the news that FHA’s single-family forward program and the home equity conversion mortgage (HECM) program are combined above the statutory required 2 percent capital ratio. Now that FHA’s single-family fund has climbed its way back, this moment presents an opportunity for the new Administration and lawmakers to consider a coordinated housing policy to ensure broad access to low downpayment lending while reducing the government’s footprint in housing and protecting taxpayers.

“FHA serves an important countercyclical role in the mortgage finance system. Following the financial crisis, FHA’s insured market share grew nearly 300 percent from its pre-crisis market and remains at elevated levels today — and it has taken nearly a decade for the MMIF to recover from serving this countercyclical role. Now that FHA is back to meeting the 2 percent ratio requirement, there is also an opportunity to focus on strengthening FHA’s capital standard, which is dramatically less than what is required of FHA’s private market counterparts, to make the agency more financially resilient going forward. Changes in market conditions, or changes in the very volatile HECM program, could easily push the FHA back into the red.

“Further, this is also the time to refocus the FHA back to its core mission. Fortunately, today there is a healthy low downpayment GSE mortgage market — backed by private mortgage insurance — available to borrowers so FHA no longer needs to play an oversized role in our housing market. Private mortgage insurers put their own capital at risk to mitigate mortgage credit risk, provided over $50 billion in credit risk protection since the financial crisis to the GSEs, and did not take any taxpayer bailout. And this market has been strengthened since the financial crisis as all MIs have all implemented significant new capital requirements, or the Private Mortgage Insurer Eligibility Requirements (PMIERs), which are stress-tested financial and capital requirements established by Fannie Mae, Freddie Mac and the Federal Housing Finance Agency, enhancing MI’s ability to assume mortgage credit risk in the future.

“The MI industry and FHA should serve complementary roles to promote broad and sustainable homeownership. To accomplish this, FHA needs to not only become more financially resilient, in line with the rest of the financial system, but also remain focused on its core mission of serving underserved communities. USMI stands ready to work with the new Administration and Congress to enhance a mortgage finance system that meets the needs of low downpayment borrowers while protecting taxpayers.”

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U.S. Mortgage Insurers (USMI) is dedicated to a housing finance system backed by private capital that enables access to housing finance for borrowers while protecting taxpayers. Mortgage insurance offers an effective way to make mortgage credit available to more people. USMI is ready to help build the future of homeownership. Learn more at www.usmi.org.

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.

Press Release: Comments on FHFA’s Single-Family Credit Risk Transfer Request for Input

Posted on by dcadmin

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For Immediate Release

October 11, 2016

Media Contact: Dan Knight

(202) 777-3547

dknight@clsstrategies.com

USMI Submits Comments on FHFA’s Single-Family Credit Risk Transfer Request for Input
Mortgage insurers outline industry’s role in shifting greater risk away from taxpayers in an equitable way for all lenders while expanding access to homeownership

WASHINGTON — U.S. Mortgage Insurers (USMI) submitted comments to the Federal Housing Finance Agency (FHFA) today regarding its Single-Family Credit Risk Transfer (CRT) Request for Input (RFI) and steps to further shield the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, as well as American taxpayers, from losses from mortgage-related risks. In its comments, USMI highlights the distinct advantages of front-end CRT done through expanded use of mortgage insurance (MI) that can address existing shortcomings in the GSEs’ credit risk transfer transactions and that can offer substantial benefits for taxpayers, lenders of all sizes, and borrowers.

USMI  notes in its comments that “increasing the proportion of front-end CRT in the Enterprises’ CRT strategy will advance four key objectives of a well-functioning housing finance system by ensuring that:  (1) a substantial of private capital loss protection is available in bad times as well as good; (2) such private capital absorbs and deepens protection against first losses before the government and taxpayer; (3) all sizes and types of financial institutions have equitable access to CRT; and (4) CRT costs are transparent, thereby enhancing borrower access to affordable mortgage credit.”

“By design, and as evidenced by the more than $50 billion in claims our industry paid during and since the financial crisis, mortgage insurance provides significant first-loss risk protection for the government and taxpayers against losses on low-down payment loans,” said Lindsey Johnson, President and Executive Director of USMI. “As the government explores ways to further reduce mortgage-related risk while also ensuring that Americans continue to have access to affordable home financing, experience shows that mortgage insurance is the answer, particularly when you consider mortgage insurance protection is at work before the risk even reaches the GSEs’ balance sheets.”

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While USMI commends FHFA in its comment letter for establishing principles and risks to evaluate front-end CRT structures, which will enable the GSEs and other market participants to analyze the virtues and shortcomings of each form of CRT using an analytical framework, it urges that “the RFI principles should apply to both existing and proposed CRT activities.”

Among other questions, the RFI inquired about benefits of front-end CRT for small lenders. USMI explains in its letter that “small lenders derive optimal benefits from CRT programs that are familiar, have minimal implementation costs, and are based on lender selection among several market participants. Accordingly, MI works very well for small lenders (and deeper-cover MI similarly would work very well for small lenders) because it is already part of their current credit origination processes, is available with transparent pricing, and is available to lenders of all sizes. On the other hand, small lenders have no access to and derive no direct benefits from back-end forms of CRT.”

“In addition to the specific goal of shifting more risk from Fannie Mae and Freddie Mac, and unlike back-end CRT, mortgage insurance plays a direct role in helping families who have good credit but can’t afford large down payments to qualify for a mortgage. For nearly sixty years, mortgage insurers have been leaders in helping millions of Americans, particularly first-time homebuyers, purchase homes in an affordable way,” Johnson said.

Johnson added, “MI is one of the best forms of time-tested credit risk protection for our nation’s mortgage finance system. Mortgage insurers have taken steps to enhance both their claims paying ability—by increased capital and operational standards—and their claims paying process through updated Master Policy Agreements. MI is private capital directly tied to housing. Unlike some other forms of CRT structures, MI is dedicated to a housing finance system in good and bad economic times. By using more MI to provide deeper front-end risk sharing on loans the GSEs guaranty, the GSEs and taxpayers will be at a much more remote risk of losses. Promoting greater front-end risk sharing with MI is a way to help build a strong, stable housing finance system, provide prudent access to affordable mortgage credit, protect taxpayers, and help facilitate the homeownership aspirations for Americans for years to come. ”

USMI’s full comments to FHFA can be found here. A fact sheet on USMI’s comments can be found here.

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U.S. Mortgage Insurers (USMI) is dedicated to a housing finance system backed by private capital that enables access to housing finance for borrowers while protecting taxpayers. Mortgage insurance offers an effective way to make mortgage credit available to more people. USMI is ready to help build the future of homeownership. Learn more at www.usmi.org.