More than a year ago, the Administration laid out several options to reduce the government's role in the housing market and allow private capital to take on the principal risks in financing this vital part of the American dream. Yet today, government entities still account for more than 90% of all mortgage financing.
Since the Administration's proposal, we've seen a flurry of often contradictory policy and regulatory activity. The unintended consequence of these well-meaning actions has been to create more uncertainty around the future of housing finance and therefore housing markets. After recently completing two terms as head of the mortgage insurance industry's trade association, I've seen the impact of regulatory and financial uncertainty up close. There are a few lessons learned that are important to consider as we move into the post-GSE era.
First, we need a comprehensive national housing finance policy that provides a clear view of the rules of the road going forward, so housing industry participants can plan how to operate effectively and profitably over the long term. This also will allow current and potential home owners to feel confident about their home purchase decision.
Policy makers and regulators also need to address some key factors impacting the housing market, including: removing uncertainty concerning too-high loan limits; shrinking FHA's bloated market share; settling the future of the government-sponsored enterprises and fixing qualified residential mortgage regulations.
The mortgage insurance industry today has adopted many changes – such as improving underwriting guidelines and granting less delegated underwriting authority – that will allow the remaining companies to continue to write high-performing, profitable new business and keep mortgage insurance a valued contributor to the broader housing market.
Like other participants in the housing finance system, the mortgage insurance industry suffered some casualties through this prolonged downturn. As a result, some say the industry's business model is broken, and that we need a new approach to our business. I disagree. Returning the private mortgage insurance industry to health and profitability requires the application of long-standing fundamental principles: strong underwriting; analyzing, managing and accurately pricing long-term credit risk; and forging strategic relationships focused on customer service.
What also would help MIs and the entire housing industry is having room to operate profitably in the low down payment space. It currently is more difficult for private mortgage insurers to achieve the appropriate long-term economic return for their risk-taking due to crowding out by government entities. Instead, many MI companies, and potential investors, are choosing to deploy capital elsewhere, or sit on cash until economic conditions are more favorable.
It’s important to realize that the MI industry is fulfilling the role it was meant to play during times of crisis in the housing market – being a first line of defense against losses. The MI industry's private capital has paid about $30 billion in claims, mostly to Fannie Mae and Freddie Mac, through the current cycle. That $30 billion, by the way, is money that didn't have to come from the taxpayer.
History has shown that the private mortgage insurance industry can withstand periods of prolonged housing depreciation and elevated foreclosure levels. For example, during the Oil Patch downturn of the 1980s and early 1990s, we saw the entry, exit, and consolidation of various MI companies. Yet the industry performed as expected by absorbing its full share of mortgage losses, and existing policyholders suffered little disruption.
The private mortgage insurance industry currently is focused on working with policy makers to demonstrate that credit enhancement provided by private capital, in the form of mortgage insurance, is a time-tested and effective execution, and should be part of any effort to reform the housing markets. We still have many challenges, but the prospects of private mortgage insurers gradually are looking up.
Kevin Schneider is the President and CEO of Genworth Financial's U.S. mortgage insurance business.
