Tag: Federal Housing Finance Agency

Blog: Time to Be Transparent about Fannie and Freddie Upfront Risk Fees

Posted on by Lindsey Johnson

Data show homeownership has become out of reach for many and that reducing or eliminating upfront fees is overdue.

By Lindsey Johnson

Eight years after the global financial crisis, the U.S. housing market still lags the recovery of the overall economy—and the homeownership rate is at a 50-year low.[1] While the new administration will have many housing related issues to address in the first few years, access to credit should not be overlooked. I was reminded of this and inspired to write this blog after reading a front page story in The Wall Street Journal on December 4 titled “Credit Restrictions Cost Home Buyers ‘Deal of a Lifetime.’”[2]

Following the financial crisis, policymakers aimed to eliminate the riskiest mortgage products on the market and shore up the financials of those institutions that make up the housing industry. And, while we cannot turn our eyes away from safety and sound mortgage lending nor can we ever allow any of the riskier types of mortgages to return that led to the financial crisis, the pendulum has swung too far in some areas. To truly address concerns about consumers’ access to mortgage finance, a number of areas of government policy need to be discussed including: 1) the GSEs’ guaranty fees (“g-fees”) policy that was adopted after the financial crisis; 2) GSE Loan Level Pricing Adjustment (LLPA) fees that were added to g-fees during the crisis; 3) private mortgage insurers’ new Private Mortgage Insurer Eligibility Requirements (PMIERs) that were established by the GSEs; and 4) the Federal Housing Administration’s (FHA) pricing and underwriting practices. We will explore many of these topics in future writings, but will focus on one specific aspect here—LLPAs.

Fannie Mae and Freddie Mac charge g-fees, which are the fees borrowers pay to have their mortgage backed by the Federal government through the GSEs. In 2008, the GSEs added LLPAs to further shield the GSEs against the risk of defaults. These crisis-era fees were levied on homebuyers in addition to other fees and costs for managing their risk, based largely on two factors—credit score and the size of their down payment—and most borrowers do not even know about these additional fees. The current president of the National Association of Realtors (NAR) put it best in an American Banker column when he stated “homebuyers are paying a steep price at the closing table in the form of unnecessary fees that, for some, put homeownership out of reach.”[3] Without being transparent about these so-called upfront risk fees, LLPAs will continue to exacerbate a serious concern over the efforts to re-balance these fees in a post-crisis environment.

Low-down payment programs are designed for families who need the help, but the impact of LLPAs on the cost of Fannie or Freddie-backed low-down payment mortgages has been chilling. The Wall Street Journal reports that, “Fannie and Freddie increased fees for riskier borrowers, widening the gap between mortgage rates available to borrowers with good and weak credit.”

This is indeed true. The Treasury Department noted in a recent report, the “credit score of the typical new mortgage borrower is nearly 40 points higher than the typical borrower in the early 2000s.” The “average credit score for those obtaining a loan backed by Fannie Mae and Freddie Mac…in conservatorship is nearly 750”—near perfect credit. And the “loan-to-value” is 80%, which means average down payments are roughly 20% of the home purchase price. These facts are “especially sobering given the fact that more than 40% of all FICO scores nationally fall below 700.”[4] I would argue that these trends mean there are many creditworthy families of all socioeconomic backgrounds deserving of conventional mortgages who are simply unable to buy their first home!

Costs of LLPA Fees on Homebuyers and Taxpayers

LLPAs impose significant costs on homebuyers and disproportionately harm first-time homebuyers and those without large down payments. If a homebuyer puts down 5% on a $200,000 home, and the borrower has a 660 FICO score and is applying for a $190,000 mortgage, then the upfront LLPA is 2.25% on this loan. The borrower will pay for this by either bringing $4,275 additional funds to closing (190,000* 2.25%) or accepting a 0.50%-0.55% higher interest rate. That higher interest rate translates to an additional $50 per month on your mortgage payment. Over 5 years that is more than $3,000 in additional interest and over the life of the loan the borrower pays more than $18,000 in additional interest.

USMI was one of 25 organizations that wrote to FHFA Director Mel Watt in June about the need to eliminate or reduce these arbitrary crisis-era fees. Fortunately, since the financial crisis, defaults have gone down for a variety of reasons, not the least of which is the fact that new underwriting rules have dramatically improved the quality of the GSE portfolio of new home loans, meaning there is a whole lot less risk on the GSEs’ books as these mortgages are performing well. Yet while the cumulative default rate has decreased from 13.7% to almost zero, GSE g-fees, which include LLPAs, have nearly tripled since the mortgage crisis. Therefore, these arbitrary fees are being imposed on borrowers, even though lending is safer and the fact that private mortgage insurance already mitigates the risk the borrower may not repay their loan. Essentially, LLPAs are double charging the borrower for the same risk. The data simply does not justify these fees anymore.

FHFA Responds…

Director Watt’s August 1 response to the 25 groups who called for FHFA and the GSEs to reduce or eliminate these LLPA fees was that “although positive developments in the mortgage market continue to occur, we believe the current g-fees and LLPAs continue to strike the risk balance.”[5] However, speaking at the MBA’s Annual Convention & Expo in October, Director Watt acknowledged that the post-2008 recovery in the housing market has been “disappointingly uneven” in many areas of the country. Not only has the recovery been slower for urban and low-income communities, but these same communities continue to have the hardest time achieving homeownership today.

NAR said in the American Banker column that the GSEs are “charging homeowners for far more risk than they [the GSEs] took on, driving tremendous profit.” The GSEs have paid more than $200 billion to the U.S. Treasury in recent years; given the GSEs are under conservatorship and are mandated to go to zero capital by 2018, the GSEs should continue to focus on providing access to credit for a broad range of borrowers.

The GSEs have a mission to “promote homeownership, especially access to affordable housing.”[6] It is time to eliminate or reduce these unnecessary fees and bring down costs for homebuyers, considering most low-down payment mortgages already come with private mortgage insurance protection—risk that Fannie and Freddie do not have to bear. Private MI has covered first loss mortgage credit risk ahead of American taxpayers for 60 years and mortgage insurers are ready to do more.

[1] Census Bureau

[2] http://www.wsj.com/articles/credit-restrictions-cost-home-buyers-deal-of-a-lifetime-1480874593

[3] http://www.americanbanker.com/bankthink/fees-meant-to-shield-gses-from-risk-are-hurting-homebuyers-1091054-1.html

[4] Antonio Weiss and Karen Dynan, Housing Finance Reform: Access and Affordability in Focus https://medium.com/@USTreasury/housing-finance-reform-access-and-affordability-in-focus-d559541a4cdc#.gu5ifppus

[5] Mel Watt, FHFA Letter to Stakeholders on LLPAs

[6] Chairman Ben Bernanke, ICBA Conference Speech: GSE Portfolios, Systemic Risk, and Affordable Housing https://www.federalreserve.gov/newsevents/speech/bernanke20070306a.htm

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

USMI-Header-750-New-Logo

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.”

screen-shot-2016-10-11-at-3-20-28-pm

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.

###

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.

Statement: New GSE Credit Insurance Pilot Program

Posted on by dcadmin

USMI-Header-750-New-Logo

For Immediate Release

September 27, 2016

Media Contact: Dan Knight

(202) 777-3547

dknight@clsstrategies.com

 

USMI Statement on New GSE Credit Insurance Pilot Program

WASHINGTON — Lindsey Johnson, President and Executive Director of U.S. Mortgage Insurers (USMI), said the following today upon the announcement from Freddie Mac about a new pilot program involving mortgage insurers:

“For the past four years, Freddie Mac and Fannie Mae have been experimenting with a number of structures to shift risk away from the GSEs to the private markets. The program announced yesterday for an offering with affiliates of private mortgage insurers is the latest addition to this effort. While it is good to see the GSEs continue to explore ways to reduce the government’s mortgage credit risk exposure, this new offering is effectively a form of credit insurance that Freddie Mac stated builds on its Agency Credit Insurance Structure (ACIS), which is a back-end credit insurance program. While some mortgage insurers are exploring and may ultimately participate in this new credit insurance program, we believe it is important to note that this new structure should not be confused with the deep cover, true mortgage insurance front-end credit risk transfer proposal that we and others have been advocating for.

As the FHFA seeks comment through the RFI process on additional ways to do greater front-end risk sharing, USMI continues to believe that MI is one of the best, time-tested forms of credit risk protection for our nation’s mortgage finance system. We also believe that using more traditional deep cover MI would be a key component to a sound housing policy in the future. Specifically, our industry proposes expanding the current risk protection provided by MI, which today guards up to 35 percent of a loan’s value, as a means of front-end credit risk transfer. This will significantly protect taxpayers while also ensuring borrower access to low down payment mortgages. Having the GSEs increase that protection coverage would put more private capital at risk—precisely what taxpayers and the economy need. Such an entity-based program would make greater use of private capital, put the GSEs and taxpayers in a more remote loss position, allow lenders of all sizes and types to participate, and, importantly, help ensure access to affordable homeownership. As it has been for the past sixty years, private MI can be provided consistently through all economic cycles. We look forward to continuing that dialogue with FHFA, Fannie Mae and Freddie Mac, policymakers, and other stakeholders.”

### 

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.