Private mortgage insurance companies, although few in number, play an important role in the housing finance system by creating sustainable homeownership for borrowers and taking on GSE credit risk.
Lindsey Johnson, President and Executive Director of U.S. Mortgage Insurers (USMI) offered MReport an inside view into the world of private mortgage insurers and how they are completely changing the mortgage game.
MReport: How has the private mortgage insurance (PMI) industry changed and evolved within the housing space?
Johnson: When I think about how our industry is evolving, two key words that come to mind are: reliability and relevance. As with every other financial services industry player, private mortgage insurance has increased capital levels, enhanced counterparty standards, and changed our master policy agreements to give better clarity and certainty of coverage when our claims are paid. Wehave also had new entrants into the system. During the crisis, we had three new mortgage insurers enter into the market and are competitive players along with the three members who were formerly in the industry. We also continue to operate in the affordability space by allowing borrowers who otherwise might not be able to attain the home they want because they are unable to meet the down payment requirements. We continue to increase our reliability because we have enhanced our capital, enhanced the master policy agreement, and we are positioned to provide greater risk protection to the GSEs and lenders in the future.
As the marketplace continues to evolve, there seems to be broad consensus that the GSEs need to maintain and grow their credit risk transfer programs. They continue to explore ways that they are going to shed risk. Mortgage insurers are adapting to be well-positioned to take additional credit risk away from the GSEs. Mortgage insurers continue to be one of the few sources out there that the GSEs can shift risk to today and are also one of the few counterparties with staying power. We are going to be there to take credit risk away from the GSEs in the good and bad economic times. In that sense, mortgage insurers continue to prove that we are as relevant today as ever.
MReport: What are some the biggest issues that PMIs face in the mortgage industry today?
Johnson: Today, some of our greatest challenges as mortgage insurers stem from the effect of government programs, including FHA and even the GSEs, where certain policies responding to the crisis, such as FHA's expansion into the conventional market and the GSEs addition of LLPAs, have not been retracted even after eight years post-crisis. Mortgage insurers continue to be the most competitive option in many circumstances in the conventional market. We are competing with government, oftentimes when our regulatory requirements and standards were increased almost uniformly across the board, while many government programs have not had those standards enhanced or even updated. That creates challenges for all private market players.
MReport: What are some of the largest successes private mortgage insurers are experiencing?
Johnson: We continue to do our primary business very well. In the past year, mortgage insurers expanded consumer access to mortgage finance credit to more than 725,000 new homeowners. Half of those that were served by mortgage insurers were first-time homebuyers and nearly 40 percent of those were borrowers with incomes below $75,000. That is significant and something that mortgage insurers are very proud of. These are borrowers that would most likely not be able to make a typical, substantial down payment of 20 percent that is required. They are appraised by lenders as having that higher credit risk without a down payment and we know that typically borrowers are far less likely to default on their mortgage when there is a down payment. Coming up with that down payment can be a huge hurdle for homeownership. We did the calculation to determine that if mortgage insurance wasn't an option, how long would it take for borrowers to save for that 20 percent down payment, and we found that it could take about 20 years for the average firefighter or school teacher to save for a down payment.
MReport: How can PMIs attract borrowers that cannot afford a down payment and get them into homes? What benefit do PMIs offer?
Johnson: It begins with education. A point that often gets missed is that unlike FHA or other options that require a higher interest rate or more fees for the entire life of the loan, private mortgage insurance is paid by the borrower and is cancelable once there is a certain amount of equity built up in the home. It's also important to understand that we continue to be in the marketplace, we continue to be very competitive with the other options out there, and we continue to be one of the safest options for individuals to get into homes where we create sustainability in the marketplace. For the GSEs, we continue to be one of the most reliable counterparties.
MReport: What piece of advice can you offer other PMIs in the industry?
Johnson: This industry has a great story to tell. It's one of making homeownership possible for many people that would otherwise be unable to obtain the home they want. We continue to be extremely relevant in today's housing finance system. So many of the issues that we face today we have faced in the past, and mortgage insurers have been a tested means to serve as a credit enhancement for borrowers to get into these homes. The housing finance system will continue to evolve, and mortgage insurance is going to be a key component and a very important credit enhancement option. Mortgage insurers are dedicated to the housing finance system and are there in both good and bad economic times. As an industry, we have to continue to tell that story.