Tag: FHFA

Statement: USMI Applauds the U.S. Senate Banking Committee’s Approval of Mark Calabria as the New Director of Federal Housing Finance Agency—Urges Quick Senate Floor Consideration

Posted on by dcadmin

WASHINGTON — Lindsey Johnson, President of U.S. Mortgage Insurers (USMI), today issued the following statement on the U.S. Senate Banking Committee’s confirmation of Dr. Mark Calabria as the Federal Housing Finance Agency (FHFA) Director: 

“USMI applauds the Senate Banking Committee’s approval of Dr. Mark Calabria to serve as the next FHFA Director. Dr. Calabria’s extensive public service and deep understanding of the mortgage finance system will serve the Agency, Fannie Mae and Freddie Mac (the “GSEs”), market participants, and homebuyers well.

“Dr. Calabria has long been an advocate for greater taxpayer protection against mortgage credit risk, including the use of private mortgage insurance to guard taxpayers and the federal government from financial risk on low down payment lending. We are confident that Dr. Calabria will continue to recognize the importance of private mortgage insurance in the conventional mortgage market both in helping creditworthy low down payment borrowers qualify for home financing, while also protecting American taxpayers from undue mortgage credit risk. Over the last 60 years, private MI has helped more than 30 million individuals become homeowners. Right now, private mortgage insurance protection is the only source of private capital that is permanently dedicated to standing in a first-loss position in front of the GSEs and taxpayers on GSE-backed mortgages, through various credit cycles.

“USMI looks forward to working closely with Dr. Calabria to ensure that borrowers continue to have competitive options for low down payment mortgage finance credit in the conventional market and to protect taxpayers even further. USMI urges a quick Senate Floor vote and support for Dr. Calabria. For more than 60 years, private mortgage insurers have played a leading role in promoting affordable and sustainable homeownership and we look forward to building upon this important mission in the future.”

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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.

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: June 1027

Posted on by Rhina Portillo

Here is a roundup of recent news in the housing finance industry. USMI released a paper assessing housing finance reform proposals announced by housing institutions and organizations, the Senate Banking Committee held a hearing on housing finance reform, Genworth Financial introduced its first-ever First-Time Homebuyer Market Report, the Federal Housing Finance Agency (FHFA) submitted its 2016 annual report to Congress, and American Action Forum (AAF) commented on Fannie Mae and Freddie Mac’s (the GSEs) increasingly risky credit portfolios while calling for greater usage of private mortgage insurance (MI).

  • USMI Releases Policy Paper Assessing Housing Finance Reform Proposals. USMI released a paper that assesses a number of reform proposals for the housing finance system. This paper analyzes the various reform proposals put forth by widely respected institutions and organizations through the lens of USMI’s housing finance reform principles, with attention to the role of private capital to protect against taxpayer risk exposure in the proposed new systems. 
  • Senate Banking Committee Holds Hearing on Housing Finance Reform. Edward DeMarco (President, Housing Policy Council), Dave Stevens (President, Mortgage Bankers Association), and Michael Calhoun (President, Center for Responsible Lending) testified before the Senate Banking Committee on principles for housing finance reform and specific proposals, including the importance of more private capital standing in front of taxpayers’ risk exposure.
  • Genworth Introduces First-Time Homebuyer Market Report. Genworth introduced its First-Time Homebuyer Market Report – the first economic series focused on first-time homebuyer market size. The report provides data spanning two housing cycles over the past 24 years that will make the first-time homebuyer market more visible to housing industry participants and policymakers. A factsheet of the report can be found here.
  • FHFA Submits 2016 Annual Report to Congress. FHFA submitted its annual Report to Congress for 2016, which describes the actions undertaken by the agency to carry out its statutory responsibilities. The report summarizes the findings of FHFA’s 2016 examinations of the GSEs as well as FHFA’s actions as conservator of the GSEs during 2016. The report also describes FHFA’s regulatory guidance, research, and publications issued during the year. 
  • AAF Comments on GSEs’ Increasingly Risky Credit Transfers. In a post on its website, AAF commented on the current status of FHFA and the GSEs, which are retaining risky assets and transferring very little credit risk while remaining dangerously undercapitalized. AAF warns that FHFA and the GSEs’ actions will most likely lead to another taxpayer bailout of the entities. AAF notes that while GSE reform remains a top priority to fix the housing finance system, private MI can be more extensively used in credit risk transfer to de-risk the GSEs’ portfolios, which in turn will protect US taxpayers and the federal government.

Newsletter: March 2017

Posted on by Rhina Portillo

Here is a roundup of recent news in the housing finance industry, including a blog post by USMI Chairman Patrick Sinks on the value of enhanced lending standards and practices, the release of a new column explaining low down payment mortgage options, a report on the Federal Housing Administration’s (FHA) exposure to risky loans, and the Federal Housing Finance Agency’s (FHFA) response to criticism over the GSEs’ entrance into financing single-family rental homes:

  • USMI Chairman Writes on Lending Standards. In a recent blog post by Patrick Sinks, the President and CEO of MGIC and Chairman of USMI, he argues that the federal government must balance important protections provided by new lending standards with reasonable consumer access to credit. Sinks also says that there must be uniform lending standards in the housing finance industry to promote consistency in the market. Sinks writes:“The safeguards that came into the marketplace for borrowers, lenders, investors, and ultimately taxpayers with the implementation of the QM standard have been helpful in improving the credit quality of the housing market in the United States… The QM rule has and will continue to be a solid foundation for responsible underwriting and borrowing in our housing system. As new housing policy or reforms to existing policies are considered, it is important that the foundations of the QM rule remain intact while also balancing the need to ensure creditworthy borrowers aren’t unnecessarily or unintentionally left on the sidelines.”
  • New Column on Low Down Payment Mortgages. A new column has been released that gives consumers the “lowdown” on low down payment mortgages. The column explains the options available to potential homebuyers who can’t afford a 20 percent down payment, giving them the pros and cons of several mortgage loan options.
  • Riskier Borrowers Make Up Growing Share of Government-Backed FHA Loans. According to USA Today, riskier borrowers are making up a growing share of new mortgages backed by the FHA, which have been pushing up delinquencies and raising concerns about a spike in defaults that could harm the housing recovery.In addition, the Inspector General for the Department of Housing and Urban Development (HUD) released a report that found HUD failed to adequately oversee billions of dollars of risky FHA loans, thereby putting the FHA’s Mutual Mortgage Insurance Fund at greater risk.
  • FHFA Director Mel Watt Defends Fannie Mae Deal with Blackstone. Politico Pro(subscription required) reported that FHFA Director Mel Watt is defending the $1 billion deal between Fannie Mae and private equity firm Blackstone to guarantee the company’s loans on 50,000 single-family rental units. Watt defended the deal in letters to the National Association of Realtors and House Democrats, each of whom have written letters to the FHFA expressing their opposition to the deal. According to Bloomberg News, Freddie Mac may also move toward backing loans that finance single-family rental (SFR) homes.

Newsletter: February 2017

Posted on by Rhina Portillo

Here is a roundup of recent news in the housing finance industry, including USMI’s release of its 2017 policy priorities and housing finance reform principles, industry outreach to the Federal Housing Finance Agency (FHFA) on GSE activities, and the recent news of increases in Federal Housing Administration (FHA) mortgage delinquencies:

  • USMI released housing finance reform principles that address ways the housing finance system can be put on a more sustainable path. These principles allow creditworthy borrowers to have access to affordable mortgage credit without exposing taxpayers and the government to housing related credit risks. These principles include:
    • Protecting taxpayers by allowing private capital to absorb all credit losses in front of any government guaranty
    • Promoting stability in a reformed housing finance system
    • Ensuring accessibility to mortgage finance for creditworthy borrowers and participation by lenders of all sizes and types
    • Fostering transparency through a consistent and coordinated approach to the federal governments’ housing policy among all agencies and entities
  • USMI released its public policy priorities for 2017, which are dedicated to fostering sustainable homeownership while significantly limiting credit risk to taxpayers and the government. These policy priorities include:
    • Enabling access to homeownership and affordable mortgage credit with MI
      • Setting and using GSE fees
      • Extending and preserving tax deductibility of MI
    • Reducing taxpayer risk with MI
      • Establishing coordinated housing policy
      • Establishing complementary roles for the Federal Housing Administration and MI
      • Strengthening the role of MI in comprehensive reform legislation
      • Expanding the use of “Deeper Cover” MI in GSE-risk sharing
  • In a joint letter, USMI and eight other financial trade groups wrote to FHFA Director Mel Watt and urged the agency to engage with industry stakeholders before moving forward with evaluating new or alternative credit score models used by Fannie Mae and Freddie Mac for conventional mortgage loans. The joint letter reads:“As the Federal Housing Finance Agency (‘FHFA’) moves forward with evaluating new/alternative models, we request that FHFA engage more openly and broadly with industry through a public forum, provide relevant data and information from the Enterprises to help inform industry participants about the potential impact of new credit score models, and share your assessment of fair lending risks posed by contemplated changes. … Given the significant implications that the various options could have on borrowers and our industries, our associations urge FHFA to broaden the input from key industry participants to help reach the most suitable option to expand credit while promoting sustainable homeownership.”
  • The National Association of Realtors (NAR) sent a letter to FHFA Director Mel Watt regarding the recent news that Fannie Mae will obtain a billion dollars’ worth of loans to finance its purchase of single family homes that will be rented out in markets with limited supply. The letter states:“Rather than focusing on allowing well-qualified Americans to build wealth through affordable mortgages options, Fannie Mae is actively financing large institutions to compete with them. These investors do not expand the affordable housing stock. Rather, in this limited market they drive up the price of rents and remove affordable inventory from the hands of American homeowners. … At a time of a historically low homeownership rate, our nation needs the GSEs to bolster homeownership opportunities for millions of responsible, middle class American families, not funding special interest deals with Wall Street financial firms that take away those opportunities.”Several House Democrats also wrote a letter to Director Watt expressing their concerns over the deal, which they say chases profits at the expense of Fannie Mae’s primary mission of boosting U.S. homeownership.
  • The House Financial Services Committee issued a statement regarding the spike in delinquencies on mortgages backed by the FHA at the end of 2016. Mortgage delinquencies at the FHA jumped in the 4th quarter of 2016 for the first time since 2006, with the delinquency rate increasing to 9.02 percent. In the statement, Chairman Jeb Hensarling stated that the data “makes it clear that President Trump was absolutely right to undo the previous administration’s irresponsible action.”

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

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.

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.”

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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.

Statement: FHFA Credit Risk Transfer Progress Report and RFI

Posted on by dcadmin


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For Immediate Release

June 30, 2016

Media Contacts

Laura Capicotto (202) 777-3536 (lcapicotto@clsstrategies.com)

 

USMI Statement on FHFA Credit Risk Transfer Progress Report and RFI

The Federal Housing Finance Agency (FHFA) has released a Progress Report and Request for Input (RFI) on Single-Family Credit Risk Transfers as a follow-up to the release of the 2016 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions.  U.S. Mortgage Insurers (USMI) welcomes the opportunity to work with FHFA and the government sponsored enterprises (GSEs) on specific steps the GSEs need to take to increase the amount and levels of credit risk transferred.  Front-end risk sharing with deeper coverage using private mortgage insurance (MI) will address existing shortcomings in the GSEs’ credit risk transfer efforts and offers substantial benefits for taxpayers and borrowers.

“The MI industry has taken substantial steps to be well positioned to provide more private capital in front of the GSEs’ risk exposure with increased and enhanced capital and reliability standards.  MIs are well positioned to do more right now to protect taxpayers and help borrowers,” said Lindsey Johnson, President and Executive Director of USMI.  “In the absence of comprehensive reform, we should explore many options in the credit risk share market, with greater balance among them.  With three years of largely back-end risk sharing transactions, the potential benefits of front-end risk sharing have not been realized.  Unfortunately, the RFI inadequately portrays the role private mortgage insurers (MIs) play in assuming credit risk and the steps MIs have taken to strengthen capital and counterparty standards (click here for MI reliability fact sheet).  The RFI discusses many risks but neither provides quantitative analysis of the size and relative importance of those risks, nor proposes or requests proposals for ways to quantify those risks.  A strong case exists for expanding mortgage insurance coverage down to 50 percent of the value of the loan and doing it on the front-end, before the risk ever reaches the GSEs’ balance sheets, as part of the next phase of experimentation.”

USMI looks forward to commenting on the following issues as part of the RFI process:

  • The need for a balance of methods to offload the mortgage risk concentrated at the GSEs and to enhance housing finance reform possibilities;
  • The need for equivalency of standards to be consistently applied to all sources of housing finance and credit enhancement to ensure there is no regulatory arbitrage;
  • The need to address pricing and modeling transparency;
  • The need to ensure that a broad set of lenders have equitable access to the system; and
  • The need to have risk sharing partners that will stay in the market in good times and bad, including during another market downturn when the housing finance system is under stress.

Front-end risk sharing via deeper cover MI transfers credit risk to MIs at the time the loan is originated, which reduces risk before it ever gets to the GSEs and provides real time price transparency so that any savings can be passed on to borrowers.

“While we understand the Enterprises’ consideration of exposure to all counterparties, we think increased private capital by strong counterparties further reduces taxpayer risk and should be encouraged.  The MI industry is ready and prepared to do more,” said Johnson.  “MIs have raised $9 billion in new capital since the financial crisis, and are well positioned to raise additional capital to meet demand.”

MIs covered roughly $50 billion in claims to the GSEs since conservatorship.  Throughout the financial crisis, USMI members never stopped paying claims, never received any bailout money from the Federal government, and continued to write new insurance.  In fact, since the crisis, MIs have paid all valid claims, with 96 percent paid in cash and the remainder due over time.  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.