Today, the House Financial Service Committee’s Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises held a hearing entitled “Future of Housing Finance: The Role of Private Mortgage Insurers.” The hearing, held only one day after the Obama Administration announced a conference to discuss the future of housing finance, focused on the extent to which the future role and structure of private mortgage insurance (PMI) and federal programs purchasing or guaranteeing residential mortgages should be influenced by federal regulation.
Testifying before the subcommittee were the following witnesses:
- Patrick Sinks, President and Chief Operating Officer, Mortgage Guaranty Insurance Corporation, on behalf of the Mortgage Insurance Companies of America
- Marti Rodamaker, President, First Citizens National Bank of Iowa, on behalf of the Independent Community Bankers Association
- Janneke Ratcliffe, Associate Director, University of North Carolina Center for Community Capital
- Anthony B. Sanders, Distinguished Professor of Finance, George Mason University
- John Taylor, President and Chief Executive Officer, National Community Reinvestment Coalition
- Deborah Goldberg, Hurricane Relief Program Director, National Fair Housing Alliance
In his opening remarks, Subcommittee Chairman Paul E. Kanjorski (D-PA) stated that “without a doubt,” PMI has enabled a greater number of people who were unable to make a 20% down payment to buy homes. Fannie Mae and Freddie Mac currently guarantee low equity loans (loans with a loan-to-value ratio in excess of 80%) only if PMI is obtained, and according to Ms. Rackliffe, in an average year nearly one-third of all home mortgages are made to borrowers with down payments of less than 20%. Many of the witnesses agreed that PMI presents a more favorable approach to underwriting loans with loan-to-value ratios in excess of 80% than providing federal guarantees for the following reasons:
- The interests of private mortgage insurers are aligned with both the borrower and the mortgage investor. Because private mortgage insurers’ capital is at risk, they have the incentive to ensure responsible underwriting standards and encourage loan modifications as opposed to foreclosure. However, Chairman Kanjorski suggested that private mortgage insurers, which pay claims only in the event of a foreclosure, should share the burden of funding loan modifications. Ms. Goldberg suggested that private mortgage insurers be required to pay a “pre-claim advance,” which is a payment to the loan servicer made before foreclosure. The pre-claim advance is intended to make loan modification a viable option.
- PMI offers a counter-cyclical element, which bank regulators are only now trying to establish in connection with loan loss reserves. Chairman Kanjorski and Mr. Sinks explained that mortgage insurers are required to maintain a “contingency reserve,” which is funded by approximately 50% of all premiums earned. Because premiums contributed to the contingency reserve may not be withdrawn for ten years, the reserve accumulates over time and may be drawn from during poor economic conditions.
- Chairman Kanjorski remarked that private mortgage insurers weathered the mortgage crisis comparatively well. Expanding on this remark, Ms. Ratcliffe noted that during the crisis, private mortgage insurers managed to attract new capital and pay substantial amounts in claims. However, Ms. Rodamaker expressed her opinion that private mortgage insurers have been inappropriately disputing claims with increasing frequency.
On the issue of government guarantees, Mr. Sinks, representing the private mortgage industry, explained that, although the private mortgage insurance industry has a substantial amount of capital ready to be deployed, it simply cannot compete with the terms of government guarantees, and, for this reason, the residential mortgage market is currently dominated by the federal government and its instrumentalities. Ms. Rodamaker agreed that the role of the FHA, holding nearly 75% of the market share of new primary insurance in the first quarter of 2010, is far too great. In May, FHA Commissioner David Stevens cautioned that “[h]aving [the] FHA do this much volume is a sign of a very sick system.” Ms. Rodamaker remarked that such a large market share was never intended to be held by the FHA and has become “a source of inappropriate risk for the government.” Dr. Sanders, who testified in greater detail at a hearing in March, explained that excessive governmental control of the mortgage market is problematic because “public policy and risk management are intertwined,” and with respect to the housing market, “the public policy side dominates prudent risk management.”
The witnesses agreed that reducing governmental participation in the mortgage market would not only reduce the risk borne by taxpayers, but would also enable private mortgage insurers to reenter the market. Private mortgage insurers would inject private capital and, with “skin in the game,” would have a greater incentive to establish and maintain responsible underwriting standards. Suggestions for how to reduce the federal government’s market share included allowing the FHA to charge higher premiums or forcing the federal programs to increase minimum required down payments.
Mr. Taylor expressed his disapproval of a structure where the borrower pays the premiums for PMI, but does not receive any benefit in the event of a foreclosure. He called for a mandatory PMI structure under which lenders, rather than borrowers, would be required to pay the premiums, but would be prohibited from passing the cost to the borrower by requiring a higher interest rate. Ms. Rodamaker countered that if PMI is funded by the borrower, the borrower may determine when the value of the home has appreciated sufficiently to support a LTV of 80%, at which point the borrower is entitled under federal law to obtain an appraisal and terminate the PMI policy. The lender, however, is not in a position to make this determination and obtain an appraisal. As a result, existing lender-paid PMI policies do not terminate until the mortgage is paid.