House Financial Services Subcommittee Issues Testimony From Mortgage Insurers President Appleton
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Chairman
Today, my testimony will focus on the following topics:
* The role of private mortgage insurance (MI) in enabling access to homeownership for borrowers without tens of thousands or even hundreds of thousands of dollars in cash for a large down payment, while protecting lenders, the government-sponsored enterprises (GSEs), and taxpayers;
* The borrowers we serve who are primarily first-time, low- and moderate-income homebuyers who lack wealth for a large down payment, but benefit from sustainable homeownership and the opportunity to create intergenerational wealth;
* The strength and resiliency of today's private MI sector and how it contributes significantly to the overall stability of the housing finance system; and
* Steps that policymakers could take to ensure that prospective homebuyers can continue to realize the American Dream of homeownership, including:
- Promoting coordinated housing finance policies to ensure that private capital is not unnecessarily or inappropriately crowded out of the marketplace by government-backed programs;
- Ensuring faithful implementation of the Prior Approval of Enterprise Products Rule1 to protect taxpayers from unnecessary risk in connection with GSE pilot programs;
- Reconsidering the mortgage risk weight framework in the proposed Basel III Endgame rulemaking2 ; and
- While outside the jurisdiction of this Committee, restoring and making permanent the individual income tax deduction for MI premiums.
The Role of
Private mortgage insurance (MI) has been an important component of the
Facilitating Borrower Access to Affordable and Sustainable Homeownership
The role of private MI is more important today than ever before. While USMI's members cannot solve for the scarcity of affordable housing supply or the high interest rates that have impacted affordability, they can solve for what has historically been the primary impediment for first-time and low- and moderate-income borrowers seeking to enter homeownership: the need for a large cash down payment.
Homeownership that requires a 20% down payment is simply out of reach for many Americans, particularly the first-time homebuyers who have traditionally propelled the market forward. According to a recent report from the
With private MI, however, potential homebuyers can put down as little as 3%, eliminating one of the largest hurdles to homeownership today. Furthermore, research from
1 12 C.F.R. 1253.
2 88
3
4 USMI analysis based on the following data points: median household income according to data from the
5
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...recent
Further, private mortgage insurers are critical partners to the GSEs, mortgage lenders, and state housing finance agencies (HFA) on initiatives and product development to sustainably expand access to homeownership, especially for first-time and low- to moderate-income buyers, as well as borrowers who have been historically underserved by the broader housing market. The private MI industry is actively engaged in supporting the GSEs' flagship affordable products (
Critical Risk Protection to Promote a Safe and Sound Housing Finance System
Private MI is also unique in its scalability as a form of credit enhancement, availability to lenders of all sizes and types, with tailored product/plan options based on a borrower's specific financial situation. Whether a large money center bank, community bank, credit union, independent mortgage bank, or other type of institution, private MI is available to help lenders serve customers without large down payments on a capital efficient basis. Today, more than
Private MI is one of the only forms of credit risk transfer (CRT) that begins on day one when the borrower assumes a mortgage and persists regardless of execution, including acquisition by a GSE, private securitization, or portfolio status. One prominent example is the way that private...
6
7 GSE Aggregate Data and Private MI 10-K Filings.
8 GSE Aggregate Data and HMDA Data.
9 GSE Aggregate Data.
10 Private
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...MI has helped de-risk the GSEs: since the GSEs entered conservatorship in 2008, private mortgage insurers have paid nearly
Strength and Resiliency of the Private
Private MI stands as a strong, resilient, and reliable component of America's low down payment mortgage market, attracting and deploying private capital to support the housing finance system in all economic cycles. After assessing past operational practices and the causes and implications of the Great Financial Crisis, the private MI industry took steps to enhance its business model to better serve the marketplace. Today, private MIs are subject to robust capital, financial, operational, and quality control standards. These standards, the Private Mortgage Insurer Eligibility Requirements (PMIERs), were developed and periodically updated jointly by the GSEs and overseen by the
In addition to holding 169% of required available assets, private MIs have adopted other enhancements to provide stability to the housing market. These include a new
11 Private MI Statutory Filings.
12
13 Private
14 USMI Member Company SEC Filings and Press Releases.
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...GSEs' Representations and Warranties framework to provide lenders with certainty and clarity of MI coverage on day one, which has been well-received by lenders.
In order to participate in the market through all economic cycles, USMI member companies must be - and are - sophisticated managers of long-term mortgage credit risk. USMI member companies have demonstrated a commitment to effective capital management through both traditional reinsurance transactions with highly rated counterparties and capital markets-based issuances, which have enabled USMI member companies to become some of the strongest and most stable counterparties to the GSEs and investors and to play a greater role to support the
MI-CRT structures have been utilized in the housing market since 2015, transforming the MI business model from "Buy-and-Hold" credit risk into "Aggregate-Manage-Distribute." MI-CRT demonstrates that USMI member companies are sophisticated experts in pricing and actively managing mortgage credit risk, which further cements the stability private MI provides in the mortgage finance system.
Since 2015, private MI companies have transferred nearly
I also want to take this opportunity on behalf of our member companies to thank members of this Committee for their work17 to ensure that the
15 MI Company CRT Transaction Data through
16 MI Company CRT Transactions Data through
17 Bipartisan House Financial Services Committee Letters from
18 Securities and Exchange Commissioner, Press Release 2023-240, "SEC Adopts Rule to Prohibit Conflicts of Interest in Certain Securitizations" (
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In addition to serving as stable, longer-term entity-based capital, private MIs underwrite and actively manage credit risk, ensuring quality control and a trusted "second pair of eyes" on risk within the financial system and for end investors. This expertise creates added value and stability for the rest of the housing finance system.
Proactive Federal Policies to Address Homeownership Affordability
As noted above, the private MI industry is a strong, resilient, and reliable component of America's housing finance system and USMI's members help enable homeownership for borrowers without large down payments while protecting lenders, the GSEs, taxpayers, and the mortgage finance system from credit risk. Policymakers, including the
Promote a Coordinated Housing Finance Policy
While conventional mortgages backed by private MI have been the most utilized option for low down payment borrowers since 2018, several
USMI encourages FHA to continue efforts to maintain and strengthen the fiscal health of the
Ensure the GSEs Comply with FHFA's Prior Approval of Enterprise Products Rule
In the conventional market, GSE pilot programs can also shift risks to taxpayers that would otherwise be borne by private capital. During their 15 years in conservatorship, the GSEs have significantly expanded their role in the housing finance system by developing and introducing numerous new products and activities, including via "pilots," without meaningful transparency into their economics, risks, or consumer impacts. While innovation can certainly play a role in better serving homebuyers, it is critical that new GSE pilots, products, and activities are subject to a transparent assessment that provides stakeholders with the opportunity to comment on the potential impacts to both consumers and non-GSE market participants.
USMI was pleased that FHFA proposed under Director Calabria and finalized under Director Thompson a rule on "Prior Approval of
Reconsider the Proposed Basel III Endgame Rulemaking
One area of concern is the recently proposed Basel III Endgame regulation,19 in which members of this subcommittee have taken a keen interest. While appropriate capital levels are important for the safe and sound operation of our banking sector, excessive capital requirements have a detrimental effect on our economy and consumers' access to financial products such as mortgages. In this instance, excessive capital requirements will reduce the availability of credit, especially for low- and moderate-income households and first-time homebuyers. Consumer groups, mortgage market participants, and members of this Committee have observed that the proposal would negatively impact the ability of certain banks to originate and hold high LTV mortgages in portfolio, service mortgages, and even finance warehouse lines for lenders, including independent mortgage banks. All of these are important issues for the Committee and policymakers to explore, though I will focus my comments on the impact on the low down payment market.
19
20
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[View chart in the link at bottom.]
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In addition to disregarding the enhanced capital and operational standards adopted by the industry since the last bank capital regulatory update, the Basel III Endgame proposal also diverges from the FHFA's own Enterprise Regulatory Capital Framework (ERCF), which recognizes the value of and provides capital relief to the GSEs for loans that are covered by private MI. FHFA's approach rightly recognizes that private MI stands in the first loss position and will absorb credit losses before others in the system, including lenders, the GSEs, and taxpayers. Private MI standard coverage insures up to 35% of the value of a loan (plus allowable interest and expenses) and increases based on the borrower's LTV ratio to ensure that the risk exposure is remote. This coverage reduces the effective LTV of a loan with private MI to well below 80%.
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[View table in the link at bottom.]
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Further, the risk mitigating benefits of private MI are present throughout the economic cycle as the presence of private MI has been shown to reduce GSE losses on loans with LTV ratios above 80% to the same levels as the losses on loans with LTV ratios up to 80%. GSE data from 1999 through 2022 in the graph below demonstrates that private MI is highly effective in reducing
mortgage credit losses to the GSEs.21
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[View chart in the link at bottom.]
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The end result of the Basel III Endgame rulemaking would be fewer, yet more expensive options for borrowers without large down payments to be served by commercial banks and they may be confined to mortgage options that are entirely or partially backed by the government. Instead,
Restore and Make Permanent the Individual Income Tax Deduction for Mortgage Insurance Premiums
One other action
21
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...(PIH). From 2007 to 2020, an average of 3.3 million low down payment homeowners annually claimed the deduction (for a total of approximately 43 million times the deduction was claimed) and they've received, on average, an annual deduction of
Conclusion
Chairman
22
23 Id.
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View original text, plus charts and table here: https://docs.house.gov/meetings/BA/BA04/20231206/116635/HHRG-118-BA04-Wstate-AppletonS-20231206.pdf
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