In a recent speech in Washington, acting Federal Housing Finance Agency Director Edward DeMarco detailed the state of the housing market, the next steps for conservatorship for Fannie Mae and Freddie Mac and the need to build a new secondary mortgage market. DeMarco talked about the need to bring private capital back to the marketplace and transition away from federal support.
Fortunately, the private mortgage insurance industry is in a stronger financial position today to help in this new era for housing. In the past 12 months, new and surviving MI companies have raised $3 billion in capital, reports National Mortgage News.
We are now at an important inflection point: Housing prices are stabilizing or, in many markets, increasing, the FHA is taking modest but important steps to improve its financial position and thoughtful proposals for the redesign of the GSE model are emerging. But regulators and legislators are on the verge of making decisions that will either fuel the now nascent return of private capital or hinder the private sector's ability to transfer risk from the taxpayer more rapidly. There are important steps federal regulators should consider.
First, as a broad swath of consumer advocates and housing experts have agreed, regulators must avoid narrowly defining the Qualified Residential Mortgage rule solely as mortgages with a high down payment, whether it's 20% or even 10%. Focusing so heavily on a high down payment for consumers to access safe, affordable mortgage credit would exclude many creditworthy borrowers from the recovering housing market. This goes against stated goals of the Obama Administration and Congress.
Second, Congress should push for revisions to the U.S implementation of the proposed Basel III capital accord, particularly with regard to the residential mortgage provisions. As proposed, the U.S. version of the Basel rule takes away all credit for the protection provided by PMI from default. The proposed rule erases the risk protection of mortgage insurance that federal bank regulators, state regulators, lawmakers, economists and others have recognized since the industry's inception. If adopted as proposed, Basel III would force banks to hold more capital against privately insured mortgages despite having insurance protection. This would give the FHA yet another unwanted competitive advantage in the market. Instead, regulators should continue the longstanding practice of granting capital credit for the role of PMI, and should strengthen the capital rules by taking MI companies up on their proposal to provide transparent evidence of claims paying ability.
Third, as policymakers lay the foundation for a new post-conservatorship secondary mortgage market, PMI should be identified as a viable and reliable option for credit enhancement. In his speech, DeMarco recognized the valuable role of private MI in risk sharing. His conclusion is grounded in the experience of the last cycle: mortgage insurance performed its purpose, putting billions of dollars of capital in a first loss position on privately insured mortgages. This is why PMI, at even deeper levels of coverage, is a part of every serious post-GSE-reform model now proposed.
Ample blame for the housing downturn was assigned at the height of market turmoil. As initial losses in the mortgage insurance industry became prolonged, questions surfaced about the role of PMI.
While these losses have not been easy for PMIs to absorb, let there be no confusion – the industry provided critical claims protection in periods of high loss backed by private capital, not government dollars. Although some insurers will not be around to provide guarantees in the years ahead, many will, including several new companies that have entered the market in the last two years. While Fannie Mae and Freddie Mac cost taxpayers more than $150 billion, mortgage insurance has shouldered upward of $35 billion in claims since 2008 and is expected to pay another $15 billion over the next few years according to SEC and statutory filings – payments that would have otherwise fallen on taxpayers.
Since our industry's inception, 25 million families have qualified for mortgages because of PMI—many of them first-time homebuyers. Now, the housing market is on the comeback, and with it comes a resurgent mortgage insurance industry helping more Americans gain access to safe, affordable mortgage credit. It is in the interest of the housing market and taxpayers for lawmakers and regulators to take the steps necessary to bring more private capital back to the marketplace and keep us headed in the right direction.
Rohit Gupta is president and CEO of U.S. Mortgage Insurance for Genworth Financial.