Freddie, Fannie should offload risk to private insurers

This September marked the ninth anniversary of the conservatorship of housing government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.

Notwithstanding their status, the GSEs continue to play a fundamental role in our housing finance system, ensuring access to mortgage credit while Congress continues the important and complicated work of enacting housing reform legislation.

{mosads}The Federal Housing Finance Agency (FHFA) is both conservator and regulator of Fannie and Freddie, and as such, it has developed on ongoing strategic plan to guide the entities while in conservatorship.

One aspect of that plan is the directive for the GSEs to roll out credit risk transfer (CRT) initiatives designed to reduce GSE risk and, in turn, reduce the risk to taxpayers.

Since FHFA published CRT guidelines in 2012, the GSEs have introduced programs including debt issuances, insurance and reinsurance, senior-subordinated offerings and lender recourse transactions.

Per the latest FHFA progress report, the GSEs have transferred risk to the tune of approximately $54.2 billion, representing 3.4 percent of the credit risk on $1.6 trillion of unpaid principal balance of mortgages.

The GSEs and FHFA are to be commended for the progress they have made in just a few years. The programs introduced to date represent some of the most innovative financial engineering that markets have seen since the financial crisis.

But with innovation comes some risk. The CRT programs that have been introduced thus far have yet to be tested across housing market cycles. The appetite for investment will likely be cyclical, and investors can quickly exit markets when conditions appear unfavorable.

Indeed, FHFA has pointed out that the CRT transactions primarily transfer “remote risk” because selling the most likely losses has proven too expensive for the GSEs.

Private mortgage insurers (MIs) represent a time-tested form of credit risk transfer with a history of serving the housing market across cycles. Since the onset of the financial crisis, private MIs have paid over $50 billion in claims to the GSEs.

Even MIs that have exited the business continue to pay claims. Moreover, the industry has taken to heart lessons learned from the crisis, adopting updated contracts that clearly specify our obligations to pay claims.

Perhaps most importantly, the industry worked closely with the FHFA and GSEs to roll out new Private Mortgage Insurer Eligibility Requirements (“PMIERs”) that mandate significantly higher risk adjusted capital requirements and strict risk and operational standards that MIs must meet in order to insure GSE loans.

In light of our expertise and the improvements we have introduced in tandem with FHFA and the GSEs, our industry is well positioned to offer a CRT program that meets the objectives of CRT as articulated by FHFA, while at the same time balancing the potential risks that some of the current CRT structures present.

Under the leadership of our trade association, we have developed a program commonly referred to as “deeper cover MI.” The concept is simple: Deeper MI leverages the existing systems and protocols already used by the GSEs and lenders to provide greater mortgage insurance protection against the risk of borrower defaults on loans the industry already insures.  

The benefits are many:

• MIs are safe and sound counterparties — our industry is held to the highest standards that the GSEs impose — far exceeding their oversight and requirements for other counterparties;
• Deeper cover MI would be available to all lenders that currently do business with the GSEs, from small community banks to the largest national lenders at the same price;
• Our pricing is transparent — many states require that we publicly file rates with insurance departments; and
• Our commitment to the mortgage market is paramount, as demonstrated by our behavior even during the worst downturn since the great depression.

Congress has taken note of the role that private MIs should be playing as part of the CRT initiative. Recently, Representatives Ed Royce (R-Calif.) and Gwen Moore (D-Wis.) introduced HR 3556, the “Taxpayer Protections and Market Access for Mortgage Finance Act of 2017.”

Among other things, the bill calls for the GSEs and FHFA to pilot deeper cover MI. Although legislation is not required for the GSEs to pilot a deeper cover MI program, the bill demonstrates Congress’ recognition of the role that MIs can play to continue to help reduce GSE and taxpayer risk.

My industry applauds the progress made by the GSEs and FHFA to date on credit risk transfer. But nine years into conservatorship, we all must continue to innovate and test programs that will serve a broad swathe of lenders and borrowers. Doing so will be critical to maintaining a sound and stable housing finance market in the years to come.

Rohit Gupta is the president and CEO for Genworth Financial’s U.S. mortgage insurance business. Genworth Financial products and services include life and long-term care insurance, mortgage insurance and annuities.