Tag: homeowners

Blog: How to lower your monthly mortgage payment

Posted on by Rhina Portillo

Owning your own home comes with many advantages, including escaping rising rents and the personal and financial stability associated with homeownership. Fortunately, millions of Americans, with less than 20 percent down, have been able to buy a home sooner thanks to mortgage insurance (MI). If you don’t put down 20 percent of the mortgage cost, you will likely be required to purchase MI, which enables low-down-payment borrowers to qualify for home financing from lenders.

While homeownership has many benefits and continues to be part of the American Dream, it is not without costs. Several surveys have found that the majority of first-time homebuyers — over 80 percent according to one study — put less than 20 percent down. For these borrowers, there is usually the added expense of MI, which may give some of these borrowers pause.

But there is good news: the monthly private mortgage insurance premiums do not last forever on most conventional loans. And when private MI (PMI) cancels, homeowners will have more cash in their pockets each month — money that is available for home improvements or other goals. It is important to understand, however, that not all MI is the same, and not all MI can be canceled.

There are numerous low-down-payment mortgage options available that include MI. The two most common are: (1) home loans backed 100 percent by the government through the Federal Housing Administration (FHA) that include both an upfront and annual mortgage insurance premium (MIP); and (2) conventional loans, which are typically backed at least in part by private sources of capital, such as private MI. The key difference is that one form can be canceled (PMI) while the other (FHA) typically cannot be canceled.

An FHA loan can be obtained with a down payment as low as 3.5 percent. However, be aware that you will typically have to pay a mortgage insurance premium (MIP) of 1.75 percent of the total loan amount at closing or have it financed into the mortgage. In addition to your regular monthly mortgage payments on your FHA loan, you will also pay a fixed monthly MIP fee for the life of the loan. This means you could pay hundreds of dollars extra every month — thousands over the life of the loan — until you pay off the entirety of the loan.

If you obtain a conventional loan with PMI, you can put as little as 3 percent down. Like an FHA loan, PMI fees are generally factored into your monthly mortgage payment. However, PMI can often be canceled once you have established 20 percent equity in the home and/or the principal balance of the mortgage is scheduled to reach 78 percent of the home’s original value. This means that the rest of your mortgage payments will not include any extra fees, so that your payments go down in time, saving you money each month. What you save in the long run can then be put toward expenses like home renovations, which can further increase your home’s value.

MI is a good thing because it bridges the divide between a low down payment and mortgage approval. But not all MI is created equal. If you want to buy a home but still save in the long run, PMI might be the right option for you. Check out lowdownpaymentfacts.org to learn more.

Report: Urban Institute Report Highlights Role Private Mortgage Insurers Have Played to Protect Taxpayers, Expand Access to Homeownership for 60 Years

Posted on by Rhina Portillo

For 60 years, private mortgage insurance (MI) has helped more than 25 million families become successful homeowners. To commemorate this milestone, the Urban Institute examined the industry’s history and the positive role MI has served for homebuyers and the mortgage finance system overall. Urban notes in its study, “[p]rivate mortgage insurers have played a crucial role over the past six decades enabling first-time homebuyers to gain access to high-[loan-to-value] conventional financing while reducing losses for the GSEs.” The report confirms that the presence of private mortgage insurance makes it easier for creditworthy borrowers with limited down payments to access conventional mortgage credit. This is the primary function of MI – to help borrowers qualify for home financing.

The report also focuses on the role MI plays to reduce taxpayers’ exposure to mortgage credit risk. MI insures the first-loss credit risk to the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, helping to reduce GSE losses, and therefore taxpayers’ losses, on defaulted mortgages. And historical experience and data show MI works. Urban found that GSE loans with MI consistently have lower loss severities than those without MI. In fact, for nearly 20 years, loans with MI have exhibited lower loss severity each origination year. The Urban analysis shows that “for 30-year fixed rate, full documentation, fully amortizing mortgages, the loss severity of loans with PMI is 40 percent lower than [loans] without.”

Loss Severity for GSE Loans with and without PMI, by Origination Year Groupings

Sources: Fannie Mae, Freddie Mac, and the Urban Institute.

Note: GSE = government-sponsored enterprise; PMI = private mortgage insurance. The GSE credit data are limited to 30-year fixed-rate, full documentation, fully amortizing mortgage loans. Adjustable-rate mortgages and Relief Refinance Mortgages are not included. Fannie Mae data include loans originated from the first quarter of 1999 (Q1 1999) to Q4 2015, with performance information on these loans through Q3 2016. Freddie Mac data include loans originated from Q1 1999 to Q3 2015, with performance information on these loans through Q1 2016.

 

This data, coupled with the more than $50 billion in claims our industry paid since the GSEs entered conservatorship—which represents over 97% of valid claims paid, underscores how MI provides significant first-loss protection for the government and taxpayers. By design, MI provides protection before the risk even reaches the GSEs’ balance sheets. As the government explores ways to further reduce mortgage credit risk while also ensuring Americans continue to have access to affordable home financing, the data shows private MI is an important solution.

The MI industry, like nearly all other industries in financial services, was tested like never before through the financial crisis. Urban’s report acknowledges the challenges the industry has overcome from the financial crisis and the opportunities ahead for the industry. Coming out of the crisis, the MI industry is even stronger with more robust underwriting standards, stronger capital positions, and improved risk management. Additionally, in the last two years, private mortgage insurers 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).

Urban notes that the industry “should be more resilient going forward” because of the important changes applied to the industry today – including the enhanced capital, operational, and risk standards ‒ and highlights the broad agreement among parties studying GSE reform for the need to reduce the government’s footprint and increase the role of private capital. These developments have helped strengthen the industry and new reforms can allow MI to take on an even greater role to continue protecting taxpayers and expanding access to homeownership for the next 60 years and beyond.

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.