Opinion: Mortgage insurance is a vital backstop

By Lindsey Johnson

The 2008 financial crisis dramatically impacted our housing-finance
system. More than 1.2 million
hard-working Americans lost their homes between 2005 and 2008, according to a
study by the Mortgage Bankers Association. By 2009, the annual number of
foreclosures rose to more than 2.8 million.

lindseyjohnsonIn attempts to stabilize the market, the federal government bailed out Fannie
Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) to the tune
of $187 billion and placed them into conservatorship. Nearly a decade later, the
GSEs remain under government control and the housing-finance system hasn’t seen
comprehensive reform.

While there are many intricate aspects of housing-finance reform to
consider, credit-risk transfer is a significant one. It is critically important
that mortgage credit risk is shifted away from the GSEs before it reaches their
balance sheets. It should be shifted to private capital sources while ensuring
liquidity in the conventional market so creditworthy borrowers continue to have
access to prudent, affordable mortgages.

This is where private mortgage insurance (PMI) comes in and why it’s been
critical to low down payment lending. For 60 years, PMI has facilitated greater
homeownership by helping families get into homes sooner while protecting
taxpayers and the government from mortgage credit risk. It should remain an
integral part of the housing-finance system.

PMI offers unparalleled risk protection to the GSEs. By design, PMI
promotes stability because coverage agreements with lenders require full
underwriting and it stands in front of the government in a so-called “first-loss
position” (different from most other forms of credit enhancement). Every dollar
paid by PMI to cover losses is a dollar the government — and therefore
taxpayers — don’t have to pay.

The Urban Institute recently found
GSE loans with PMI have a 40 percent lower loss-severity rate than loans
without PMI. It also noted that for nearly 20 years, conventional loans with PMI
have revealed lower loss severity each origination year. Since the GSEs entered
conservatorship, the PMI industry has covered more than $50 billion in claims,
which represents 100 percent of valid claims since the financial crisis — 97 percent paid in cash and the
remainder due over time.

It’s important to view the
realities of today’s PMI industry when determining the best course for the
GSEs. PMI has experienced significant reform in the last few years. Mortgage insurers
have increased their claims paying ability by adhering to new, higher capital and
operational standards under the Private Mortgage Insurer Eligibility
Requirements.

They also have implemented
updated master policies, increasing clarity of contract terms to ensure timely,
consistent and accurate policy administration and claim processing. The Urban Institute
notes the PMI industry should be more resilient going forward because of the important
changes applied to it, which include enhanced capital, operational and risk
standards. Today, the industry is arguably the strongest, most accessible, and
most transparent GSE counterparty when it comes to transferring risk and
protecting taxpayers.

As the government considers
comprehensive housing reform, PMI can and should play a greater role in reducing
GSE and taxpayers risk, particularly in the form of deeper PMI coverage. Right
now, PMI covers, on average, 25 percent of the loan value, but the financial
crisis showed that a significant downturn of losses can and will exceed this
amount.  Therefore, an essential piece of
reform needs to be a greater level of first-loss protection available through
all market cycles. 

Deeper PMI coverage will nearly double the first layer of protection
afforded to the GSEs and taxpayers. It’s also good for consumers. Costs won’t
increase because allowing deeper PMI coverage will allow the GSEs to reduce
their committed capital for this risk by approximately 75 percent. What’s more,
deeper coverage can be made available to lenders across the country without
any biases or pricing advantages based on size or volume.

Finally, through reform, the
government must address the need for greater coordination and transparency in
the housing-finance system. One of the lasting impacts of 2008 has been the dramatic
expansion of the Federal Housing Administration’s (FHA’s) footprint, which has
historically served lower-income homebuyers, but now directly competes with private
capital.

To be sure, the FHA plays a
critically important role; but its mortgages are 100 percent government-backed when
it comes to defaults. Where private capital is capable of shouldering mortgage
credit risk so taxpayers don’t have to, it should be the preferred approach. FHA’s
role in the housing-finance system must be reformed in a coordinated manner. It’s
vital the government and private market work more efficiently to promote
sustainable homeownership.

Since 1957, PMI has helped more than 25 million families become
homeowners sooner — nearly 50 percent of whom were first-time homebuyers. Comprehensive
GSE reform is critical to ensuring the housing-finance system remains healthy
and robust. PMI must remain a cornerstone in this system, so it can continue to
serve future homebuyers and protect taxpayers.

Lindsey Johnson is the president and executive director of U.S. Mortgage Insurers,
a trade association serving the mortgage insurance industry.

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