Recovering from what is described as the most severe housing downturn the country has ever faced has been difficult and painful. So it is good to report some positive news on the mortgage insurance (MI) front.
MGIC and other mortgage insurance companies are entering the final turn in our recovery efforts. The downturn forced the industry to look critically at what we do and how we might do it better. This self-assessment has extended from pricing, credit guidelines, and underwriting to how claims are handled. The bottom line is that the mortgage insurance industry on its own has worked diligently to incorporate lessons learned from the downturn.
Both the GSEs and FHFA have taken a hard look at us, too.[i]
The GSEs, FHFA and MIs collaborated to update the MI master policy and to draft the Private Mortgage Insurer Eligibility Requirements (PMIERs), which are intended to modernize and clarify the standards that proved, in some cases, insufficient during the downturn.[ii]
MGIC fully supports these efforts. Our new Master Policy has been approved by the GSEs and will be implemented on October 1, 2014. Additionally, MGIC has proposed adjustments to the PMIERs[iii], that would not only increase the protection given to the GSEs and lenders but, would also allow for broader access to credit.
The finalized PMIERs, new Master Policies and the self-initiated moves by the MIs, position the MIs to improve access to credit and play a broader role in the mortgage industry.
At minimum, we hope that these initiatives result in the GSEs fully realizing the value of mortgage insurance. Today, the GSEs routinely discount the benefit of mortgage insurance by 20-25%.[iv] This discounting results in where borrowers end up paying more than is necessary for credit enhancement on conventional high LTV loans through higher G fees and MI.
The completion of these initiatives should also encourage the FHFA and the GSEs to allow the MIs to play a broader role through up-front risk sharing with deepened mortgage insurance coverage in exchange for lower G fees.
Up-front risk sharing has many advantages over the GSE’s present practices of “back-end” risk sharing. Through front-end risk sharing, the GSEs are risk remote before they purchase the loan – better protecting taxpayers. Additionally, up-front risk sharing will result in increase competition (several MIs working with many lenders) – resulting in lower borrower cost.
The updated MI Master Policy and adoption of prudent PMIERs would seem to be the “Good Housekeeping” seal of approval needed to eliminate the MI haircut by the GSEs and allow material borrower-friendly alterations to the existing G fee framework, and create a strong incentive for FHFA to encourage GSE exploration of upfront credit risk transfer alternatives involving use of MI.
MGIC is not alone in this thinking. The MBA and other lender advocates have recognized the opportunity[v], and supported the benefits an upfront risk-sharing framework can have for borrowers.
Tags: FHFA, GSEs, Mortgage Industry, Mortgage Insurance, PMIERs, Top Content