At the annual MBA convention in Las Vegas last month, HUD Secretary Julian Castro said, “My team is also working to help more Veterans buy a home. The VA program limits its loan guarantee to a maximum of 25%. This leaves a lot of small lenders awfully exposed and reluctant to offer Veterans credit under this initiative. So Ginnie Mae is in discussions with private sector partners to design a program that would allow lenders to purchase additional insurance to supplement the VA guarantee. In doing so, they can feel confident when offering these loans — giving more of our nation’s heroes a chance to buy a home in the country they risked everything to protect.”
We have discussed previously in this space the ways in which private mortgage insurance can help shift risk away from taxpayers through deeper coverage on loans purchased by Fannie Mae and Freddie Mac. In the low-down-payment space, however, the government insurance programs – FHA, VA, and RHS – continue to provide government-backed credit enhancement to a significant portion of the market. Around half of all mortgage loans to purchase a home have less than 20% down payments. Of those, around half are guaranteed by FHA, VA, or RHS. The combination of government mortgage insurance and the Ginnie Mae securitization guaranty creates a significant amount of risk to taxpayers. At MGIC we believe it is time to explore ways in which private insurance can step in front of the taxpayers in this area, too.
In a previous post, I discussed the Ginnie Mae model and how putting private insurance in a first loss position in a Ginnie Mae securitization could bring several benefits to housing finance. Such a plan is viewed by many as interesting, but a big step that will require legislation of some form. There are ways to move in that direction, however, and the discussions referred to by Secretary Castro point to one of them.
A significant strength of the Ginnie Mae model is the risk that is retained by the Ginnie Mae Issuer/Servicer. In the case of FHA insurance, which covers 100% of the loan balance and the vast majority of ordinary interest and expenses, there is little risk that is held by the Issuer/Servicer. In the case of VA insurance, however, around 25% of the balance is covered, so the Issuer/Servicer is exposed to considerable potential losses, particularly in markets where there is a significant home price decline. This is especially true because most VA insured loans have zero down payment. Several of our lender customers have asked if we are exploring how to add supplemental insurance on top of VA to reduce their exposure. We are engaging in active discussions with these lenders, VA, and Ginnie Mae to determine how such a plan may be implemented. We still believe it makes more sense for private insurance to be in the first loss position, but supplemental coverage would require no special legislation, no change to existing VA and Ginnie Mae programs, and it will reduce the risk to Ginnie Mae of Issuer/Servicer failure. More importantly, it would require no additional charge to borrowers. It is a step in the right direction, and it should help people envision other ways government insurance programs can cooperate with private insurers to put more private insurance capital in front of taxpayers.Tags: Ginnie Mae, Mortgage Industry, Mortgage Insurance, VA Loan