On March 23, Treasury Secretary Timothy Geithner told Congress, "Government's role in the housing finance system and level of direct involvement will change … and the administration is committed to encouraging private capital to return to the housing finance market."
For private mortgage insurers, with private capital available now to support annual production of more than $260 billion in new, affordable mortgage lending, Secretary Geithner's remarks were a welcome pronouncement.
In addition to eliminating any doubt that the administration clearly understands the economic recovery cannot be sustained with government dollars alone, it suggested clear recognition by the administration that many in the private sector were ready to do more.
In housing, especially, private capital is essential to healthy credit markets that can support originations and refinancing.
Moreover, easing access to private capital is critically important to reducing the large amounts of deficit spending that threaten to drive interest rates higher and weaken our economic recovery.
Despite what the government has done to increase private-sector lending, at least one major obstacle is severely limiting the private sector's ability to do more. That impediment can be eliminated immediately by simply removing unnecessary new fees imposed without rationale by Fannie Mae and Freddie Mac.
Starting late in 2007, Fannie Mae and Freddie Mac started imposing additional charges on conventional, low-down-payment loans. These fees add to the cost of conventional loans with private mortgage insurance, affecting even borrowers with good credit and well-underwritten loans. The fees have little or no impact on the financial profile of either Fannie Mae or Freddie Mac. They are not held in reserve against future losses, and there is no economic rationale for imposing them across all borrower profiles.
They do, however, make the difference between a homebuyer choosing a government-supported FHA loan or one from a private mortgage insurer, a decision that has prevented using private capital to its full advantage and put the U.S. taxpayer on the hook for potentially more risk.
Consequently, the federal government, either directly or indirectly, stood behind more than 96% of the new mortgages issued in the first quarter of 2010, with government loans insured by the Federal Housing Administration accounting for nearly 25% of all originations.
Combined taxpayer exposure to FHA loans and conventional Fannie Mae and Freddie Mac loans now under government conservatorship totals $5.3 trillion. That's a troubling number.
The FHA has made clear its desire to return to a more traditional 10%-15% share of mortgage originations. Doing so would strengthen the FHA's viability and reduce taxpayer risk on the loans it insures.
At the same time, we would see growth return to the conventional purchase market, with private capital provided by mortgage insurers, not the government, behind low-down-payment conventional loans.
Bringing private capital back to the market will help restore the traditional balance between FHA-insured loans backed by the government at taxpayer expense and conventional low-down-payment loans insured by private mortgage financing.
That capital is available. Private mortgage insurers have the capacity to insure four times their current level of business in the year ahead, helping some 1.3 million homebuyers get the safe, secure, low-down-payment loans they need.
The case for private mortgage insurance — particularly on Fannie Mae and Freddie Mac loans — is compelling. For more than 50 years, the industry has helped make conventional mortgage loans available to people with a down payment of less than 20%. Holding 50% of all premiums received in reserve, it has built capital in good times to pay claims in downturns.
That's "skin in the game" for every loan we insure, and since 2008 private mortgage insurers have paid more than $9.3 billion in claims, including $6.9 billion to Fannie Mae and Freddie Mac. The model works just as it was designed, protecting both lenders and investors. And ongoing homeowner assistance efforts have helped thousands of borrowers avoid foreclosure and keep their homes during even the toughest financial times. Private mortgage insurers helped complete more than 290,000 workouts of troubled loans during 2008-9, saving more than $565 billion in loans from foreclosure.
Secretary Geithner said he was committed to encouraging private capital to return to the market. The mortgage insurance industry needs no further encouragement. We have the will — and the capital — if the government will lead the way.