Washington has been busy during these last months of 2015. Despite no signs of comprehensive housing reform on the horizon until well after the presidential election, there has been a surprising amount of activity on housing-related issues. From the legislative logjam brokered by our new House Speaker Paul D. Ryan from Janesville, Wis., to the recent spike in FHA’s reverse mortgage activity, I’m here to report a lot has been happening.
Paul Ryan became Speaker Oct. 29 of this year. He is the 54th Speaker of the US House of Representatives and, at 45-years-old, the youngest in 150 years. Thanks to his predecessor, Speaker Boehner, Congress was able to pass a two-year budget agreement that raises the Budget Control Act spending caps by $80 billion and to take the debt limit off the table until early 2017. The White House, Senate Republicans and Democrats all joined in passing the measure. The only outspoken elected officials against the provision were some of the current Senate Republican presidential candidates. Speaker Ryan has promised to reform the House by allowing more participation in leadership decisions. He currently has the support of a majority of the “Freedom Caucus,” made up of about 40 of the most conservative members of the House.
Now that the budget agreement is set, Congress turns to spending it. Congress is in the midst of a large Omnibus Spending Bill that needs to be in place by Dec. 11. It is expected that this will drift to Dec. 18. However, with the recent passage of a six-year transportation bill under Speaker Ryan’s watch, passage before Christmas is likely. Congress passed a multi-year highway and transit bill in November that was signed into law by the President. This law authorizes nearly $340 billion for highway and transit programs over six years. The measure also revived the Export-Import Bank, a trade-promoting agency that expired last summer amid attacks from conservative lawmakers. A win and a push on housing reform sit in these year-end debates in Washington. First of all, there was a little-known provision in the debate on the transportation bill that would have extended Fannie and Freddie’s Credit Risk Guarantee Fee, due to sunset in 2021, to 2025. We, along with others in the housing industry, opposed this four-year extension. Although the bill was passed by the US Senate, due to the widespread opposition the extension was removed by the House, thereby stopping the use of those fees to fund transportation. Two other items sit in the balance as Christmas approaches. One would direct FHFA and the GSEs to work on upfront risk-sharing. This would provide thousands of lenders with the opportunity to participate in risk-sharing transactions with MIs and the GSEs. The second would make permanent the tax deductibility of MI premium, providing millions of homeowners the ability to deduct their MI premiums from their income taxes. We remain focused on including these provisions in the Omnibus Spending Bill.
The Federal Housing Administration Fiscal Year 2015 actuarial report showed unexpected improvement this November. In addition to the predictable progress in the agency’s forward business, a surprising uptick in the volatile reverse-mortgage or HECM (Home Equity Conversion Mortgage) program raised economic value in the agency’s Mutual Mortgage Insurance Fund by $19 billion, or to a total of $23.8 billion. As a result, the combined secondary reserve ratio now exceeds the statutory 2% minimum for the first time since 2009. However by pulling out the HECM program the actual MMI fund would only have a 1.6% minimum reserve. A deeper analysis of the FY2015 book year, that included a 50-bp price cut, shows that despite the increase in volume the January 2015 price cut ripples through the book year to keep it generating less reserves than the smaller, higher priced 2014 book.
While the headline is accurate the volatility of the HECM fund will continue to help and hurt the overall MMI fund, such that what’s more than 2% this year, may tank to 1% next year. One thought to address this issue would be to simply separate the HECM program from the larger MMI fund. Such a move would require Congressional authorship and approval, but would provide greater transparency into how much capital FHA actually needs to operate. Another thought, would be to require a 4% reserve ratio instead of 2%. More to come on this, especially if the President looks for another price cut in 2016.
Our final push into 2016 revolves around upfront risk-sharing with the GSEs. Although FHFA has suggested that the GSEs utilize five or six types of risk-sharing, to date, the GSEs have only perfected two types of back-end risk-sharing structures. We, along with other members United States Mortgage Insurers (USMI), have shown that upfront risk-sharing works. Today, private mortgage insurance (MI) already provides significant risk protection against losses on low-down-payment loans. Traditionally, for loans with down payments of less than 20% of the home value, first losses from a default are covered by MI — not by taxpayers.
In the future, mortgage insurance could provide even deeper coverage on low-down-payment loans. Specifically, MI can provide additional coverage for potential losses by increasing coverage from around 30% to 50% (deep coverage MI) of the loan’s loan-to-value ratio, serving to increase private capital and further de-risk the GSEs.
In order to test this concept, USMI commissioned Milliman, Inc., one of the world’s largest providers of actuarial and related products and services, to examine the costs of providing deeper coverage MI and the effect on a borrower’s cost of homeownership. The Milliman study found that covering additional mortgage credit risk with MI would almost double the amount of loss protection afforded to the GSEs and taxpayers, allow the GSEs to reduce GSE guarantee fees (G-Fees), and as a result, reduce average borrower costs by approximately $2,300 over the expected life of a mortgage loan.
Greater front-end risk-sharing with MI is a simple way to help:
- Build a stronger, more sustainable housing finance system, with private capital bearing more of the risks of another housing downturn, so the taxpayers won’t have to.
- Ensure that Americans continue to have access to prudent, affordable mortgage credit.
As policymakers look for solutions, MI is an obvious choice.
We will be pursuing all of these issues in Washington through the end of this year and in 2016. What we can do now around the edges of housing policy reform will lay the foundation of the larger debate after the presidential election next year. We remain fully engaged and continue to show how private capital can reduce taxpayer risk and provide more choices for lenders of all sizes.Tags: housing, Mortgage, Mortgage Industry, Mortgage Insurance