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Opinion: PMI must play crucial role in housing reform

By Bradley Shuster

Government-backed conventional mortgages totaled approximately $5.3 trillion as of summer 2018. As every follower of the mortgage-finance system knows, the guarantors of this multitrillion-dollar mortgage credit risk — the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac — have remained under government control since being placed into conservatorship in 2008.

bradshusterWhile GSE reform is contemplated by Congress each year, holistic legislative reform remains elusive. It’s time for our federal elected officials to put the GSEs on a more sustainable path so U.S. taxpayers don’t continue to bear the burden of undue mortgage credit risk.

There is encouraging news, however: Some areas of reform have received consistent bipartisan support. The use of private capital to transfer credit risk away from taxpayers is widely supported by housing experts, members of Congress from both sides of the aisle and the White House. There are a number of ways to do this, and over the past several years, the GSEs have been exploring new programs, including transferring second-loss risk (so-called “mezzanine risk”) through credit-risk transfer (CRT) transactions.

For over 60 years, private mortgage insurance (MI) has served as a significant means for transferring mortgage credit risk away from the federal government and taxpayers. This is for good reason: Private MI is one of the only forms of loan-level credit enhancement positioned in a first-loss position to lenders and the GSEs. Private insurance transfers the risk before it ever reaches the GSEs’ balance sheets. Private MI has helped nearly 30 million families become homeowners, including many first-time homebuyers and low- to moderate-income borrowers, by allowing them to receive prudently underwritten mortgages with as little as 3 percent down. In fact, private MI helped more than 1 million borrowers purchase or refinance a mortgage in 2017 alone, and 56 percent of purchase loans went to first-time homebuyers. Further, private MI not only helps put families in homes, but also keeps them there by being responsive to troubled borrowers and working with homeowners to avoid default with prudent modifications.

Since the financial crisis, the MI industry has taken important steps to strengthen and enhance its risk protection capabilities, particularly with the new Private Mortgage Insurer Eligibility Requirements (PMIERs) enacted in 2015. These nearly doubled the industry’s pre-crisis capital requirements. The industry also has improved its claims processes through updated master policy agreements, which provide lenders with greater clarity about when and how the industry pays claims. Today, more than $930 billion in GSE mortgages have private MI coverage and the industry has covered more than $50 billion in claims since the GSEs entered conservatorship. 

When a mortgage insurer pays a claim, it’s a claim that neither the lender nor taxpayers (as the ultimate backstop for the GSEs) have to shoulder. It’s not just claims, though. The MI industry is a leader in mortgage underwriting. As a loan-level product, private MI brings to the table a second set of eyes in the underwriting process. This helps to approve low downpayment borrowers for home financing while ensuring these borrowers meet today’s prudent lending requirements. This is where private MI has unique advantages over other forms of credit enhancement, and why it’s essential private MI remains a fundamental component of the way the GSEs transfer credit risk in any reformed system.

The GSEs and the Federal Housing Finance Agency (FHFA), as conservator and regulator, are experimenting with other credit-risk transfer mechanisms as Congress considers reform. These different mechanisms are similar to how mortgage insurers manage and distribute their own credit-risk exposures. Importantly, unlike some other forms of opportunistic capital, private MI is consistently available across market cycles. This ensures borrowers will continue to have access to affordable mortgage credit even during bad economies, and that taxpayers will consistently have meaningful protection against mortgage credit risk. Importantly, mortgage insurers do not just buy and hold mortgage credit risk.

Over the years, the MI industry has demonstrated increasing sophistication in evaluating and managing this long-tail mortgage credit risk. For decades, the MI industry has actively participated in reinsurance transactions in the normal course of business to disperse risk and to enhance its capital allocations that are not tied to housing and, consequently, will not be available for this type of mortgage credit risk when the housing sector is under stress. That’s one of the reasons why private MI remains an essential form of risk transfer for the GSEs. If the GSEs were to rely on their own balance sheets or an MI alternative that suddenly became unavailable, the government and taxpayers would be unduly exposed to risk.

The MI industry is poised and capable of doing even more in any reformed housing system. While it is prudent for the GSEs to transfer second-loss risk into the capital markets, the MI industry remains active in underwriting and managing new credit risk — thereby reducing risk in the overall mortgage finance system — and remains committed to providing credit enhancement that protects taxpayers while ensuring borrowers have access to low-downpayment lending.

The MI industry and its products are among the most sophisticated and experienced in the housing-finance system when it comes to risk management. The MI industry has proven to be unparalleled in its innovation and leadership in promoting homeownership for the last six decades and has much more to offer American homeowners. Lawmakers and policymakers have important work ahead of them to reform the GSEs. The MI industry stands at the ready to ensure its invaluable services are part of any new system.

Bradley Shuster is the chairman of the board and CEO of National MI, and serves as current chairman of U.S. Mortgage Insurers (USMI). The viewpoints expressed by authors do not necessarily reflect the opinions of Scotsman Guide Media.


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