Tag: housing finance

Newsletter: October 2016

Posted on by Rhina Portillo

On October 13, the comment period closed for the Federal Housing Finance Agency (FHFA)’s Single-Family Credit Risk Transfer (CRT) Request for Input (RFI). Below is a roundup of the comment letters submitted by USMI and numerous other housing finance organizations that expressed support behind efforts to reduce government, and therefore taxpayers’, risk exposure by positioning more private capital in a “first loss” position ahead of the government sponsored enterprises (GSEs) through expanded mortgage insurance.

  • USMI notes in its comment letter the distinct advantages of front-end CRT done through expanded use of MI: “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 measure 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 taxpayers; (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.” These comments were further highlighted in an article by the Mortgage Professional America magazine. The full comment letter is available here. USMI’s RFI fact sheet can be found here.

Following the submission of USMI’s comment letter, an op-ed by USMI President Lindsey Johnson was published in The Hill that echoes the benefits provided to the GSEs and US taxpayers by front-end CRT through expanded use of MI.

  • A number of other stakeholders and organizations also weighed in, supporting efforts to expand the use of MI:
    • Urban Institute wrote: “The GSEs could share additional credit risk through this channel by having some MIs cover a deeper level of first loss, down to, say, an effective LTV of 50%. So-called deep cover MI has several attractive features. First, it extends a structure already in wide use, making it easy for lenders of all sizes to adopt. Second, in contract to the front-end structures used to date, it is equally available to and can be equally priced for lenders of all sizes. Third, it is completely transparent… Since mortgage insurance is the only product MIs offer, they will provide capital in good times and bad.”
    • National Association of Home Builders wrote: “Deep coverage MI would allow mortgage insurance companies to reduce the Enterprises’ exposure to credit losses to as low as 50 percent of the mortgage loan amount. The Enterprises would reduce their guarantee fees on the mortgage loans commensurate with the cost of the risk they transfer to the mortgage insurers. The reduced guarantee fee charged by the Enterprises in exchange for incurring less credit risk can be passed on to consumers, reducing the cost of the mortgage loans and increasing the availability of credit.”
    • Mortgage Bankers Association wrote: “Up-front risk-sharing structures with committed mortgage market participants such as lenders, mortgage Real Estate Investment Trusts (REITs) and mortgage insurers can distribute mortgage credit risk prior to the loan(s) being acquired by the GSEs, while offering potential borrower benefits… Well-conceived up-front risk sharing pilot programs, such as expanded lender recourse offerings, deeper mortgage insurance or other capital markets structures that are executed prior to GSE acquisition, can help the GSEs better determine which transaction structures are best able to expand the sources of private capital and withstand both the peaks and valleys in the credit cycle.” These comments were further highlighted in an article by Scotsman Guide.
    • Community Mortgage Lenders of America wrote: “There is no substitute for the depth of experience, the broad web of customer relationships and level of service that the MI industry provides to lenders, nor to the key role played by mortgage insurers in facilitating low down payment lending for borrowers whose home finance needs are served with a low down payment mortgage.”
    • Credit Union National Association wrote: “… private mortgage insurance needs to be maintained as an option as it can be utilized as an effective risk transfer strategy.”
    • Housing Policy Council wrote: “We specifically recommend that FHFA and the Enterprise test deeper mortgage insurance through a pilot program. Of the various structures discussed in the RFI, only deeper mortgage insurance has yet to be tested in the marketplace.”

In addition, last week the Congressional Budget Office (CBO) released a report entitled “The Effects of Increasing Fannie Mae’s and Freddie Mac’s Capital.” The October 20th report came at the request of Senate Banking Committee Chairman Richard Shelby (R-AL) and analyzes a policy that would allow the GSEs to increase their capital by reducing payments to Treasury, as well as discusses the effects it would have on the federal budget and the U.S. mortgage market.

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.