Private mortgage insurance (MI) is a reliable and transparent form of credit risk protection for originators and servicers of all types and sizes. This is an undisputable fact backed by a 60-year history of mortgage insurers serving market participants in an inclusive and scalable fashion. Expanding the use of mortgage insurance through front-end credit risk transfer (CRT) programs with Fannie Mae and Freddie Mac (the GSEs) would capitalize on an existing structure that was designed to improve access to homeownership.
As an industry, mortgage insurers have met regularly with trade groups representing community banks and other small lenders regarding their concerns that front-end execution may place them at a disadvantage with larger lenders. The mortgage insurance industry would not want this outcome. Rather, we endorse a process that levels the playing field for all lenders, regardless of size. While our industry welcomes the ongoing dialog, it is important to note that respected analysts have examined these concerns and believe them to be manageable. We are concerned that such discussions could potentially delay the use of front-end CRT using deeper MI and limit the testing of other structures, which makes it difficult to determine which structures are best suited for using private capital.
Increasing private capital takes credit risk from the GSEs and helps withstand the peaks and valleys that are inherent in the mortgage lending cycle.
The Urban Institute’s white paper “How to Improve Fannie and Freddie’s Risk Sharing Effort” and U.S. Mortgage Insurers’ (USMI) response to the FHFA’s request for input provide excellent insight into how deep cover mortgage insurance will advance the four key objectives of a well-functioning housing finance system. Namely, deeper MI protects taxpayers, promotes stability, ensures accessibility and fosters transparency.
With strengthened risk-adjusted capital rules from both the GSEs and soon from the state regulators, and a clear understanding between all parties of the risk we insure, mortgage insurers are well positioned to take on a larger role. As an industry, we have paid more than $50 billion in claims since the Great Recession. When the capital markets left the market, it was the private mortgage insurers who were there, every day, underwriting loans and paying valid claims.
Deeper MI could provide a reliable and durable source of CRT capacity to complement the untested and more volatile back-end approaches used to date. It relies on the important existing relationships MIs have with their lender customers and strengthens the critical bright line between the primary origination market and secondary liquidity market. It also transfers credit risk before a loan is acquired and guaranteed. It demonstrates a proof of concept for having a more remote guarantor in a reformed housing finance system and unbundling the many functions performed by the GSEs in the current unreformed system.
Rather than suffer continued delay, I invite our lender customers to work with the MI industry, FHFA and the GSEs, to make sure their concerns are appropriately addressed and that the end result is a level playing field for all lenders. Let’s get to work.Tags: Credit Risk Transfer, CRT, GSE, GSEs, housing, Housing Market, Mortgage, Mortgage Banking, Mortgage Industry, Mortgage Insurance, Mortgage Opportunities