TheMReport

March 2016 - RIP Dodd Frank

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26 | TH E M R EP O RT FEATURE 2011. The paper largely promoted the use of private markets and capital—and that was understand- able. As an example, the paper recommended returning the FHA to its traditional role as a targeted supporter of affordable mortgages and simultaneously called for the private sector to absorb more risk in front of the taxpayer. Unfortunately, the path to achiev- ing those goals was not clearly de- fined, and unsurprisingly obstacles have arisen. The obstacles are not small and must be resolved before the publication's aims can be met. In the case of the FHA, the big- gest issue lies in the government's failure to establish a uniform and transparent measure of credit risk. Although the credit risk of govern- ment mortgages and conventional conforming mortgages is ulti- mately backstopped by the same entity, private capital from the MI industry reduces the exposure to the U.S. Treasury on conventional loans. These loans should, there- fore, be favored over government mortgages whenever possible. Regardless of the logic in favoring conventional mortgages, the credit risk associated with government mortgages is measured differently and less stringently than the credit risk associated with conventional ones, and this means more business moves toward the FHA and away from the GSEs and private capital. Hiccups and Hurdles R ecall the overlap in service areas between the MI in- dustry and the FHA. It should have been a relatively easy task for the MI industry to progres- sively return to its historical market share within the prime market while the FHA con- tracts—which actually occurred through the latter half of 2014. However, private expansion and public contraction—both goals outlined in the white paper—stalled and then reversed in 2015. Two events occurred to cause the reversal of this path. In January 2015, the FHA announced a 50-basis-point reduction in its annual mortgage insurance premium, and in April 2015, the GSEs and FHFA finalized the up - dated Private Mortgage Insurance Eligibility Requirements (PMIERs). These two events sent inconsistent messages regarding the credit risk of low down-payment mortgages for the prime market. The FHA's premium rate reduc - tion increased business volumes for the FHA, resulting in about a 5 percentage point shift in insured market share from the private MI industry to the FHA. Left unexplored and unexplained was the analytic rationale for the reduction in the FHA's premium rates. Beyond noting that the FHA annual premium rates were at a historical high and that lower premiums would expand credit ac - cess, no further detail was given. In the meantime, the PMIERs approached the credit risk of low down-payment mortgages for the prime market in a dramatically different way. The PMIERs estab - lished risk-based asset requirements for MI companies that are based on borrower, loan, and collateral attributes of the insured mortgages, and that generate higher asset re - quirements for "riskier" mortgages. MI premiums for certain segments have increased as a result, but the higher risk-based LLPAs that were imposed by the GSEs in 2009 have remained the same. From an overall housing finance system perspective, the result was simple: The same person borrow - ing the same amount of money for the same term to purchase the same house would receive different prices from the two facilities, de - spite the fact that they are backed by the same backstop guarantor. Further, the different treatment may also increase the FHA's mar- ket footprint—not reduce it in a manner consistent with the white paper's goals. Moving Forward T o solve this issue, the in- dustry can't simply adjust FHA and MI premium rates, but instead, it needs to highlight the nature of the problem and the op- portunity. Having the U.S. Trea- sury as the backstop for most of the residential mortgage market is seen by many in the industry as a problem, but it also represents an opportunity for the govern- ment to resolve an unaddressed inconsistency. There is evidence of the ad- ditional risk associated with low down-payment lending. The question is how much additional risk is there, and how is that risk measured and paid for? The lack of clarity in the current system prevents policymakers from determining whether or how the private MI industry, the GSEs, and the FHA might work in a more complementary fashion. The over- all housing finance system can be more effective if all parties work in concert, and beginning dialogue among industry leaders could help move this goal along. In addition to an open dialogue about the system, related issues such as credit access and efficient delivery of credit subsidies need to be considered as well, but only after the government adopts uniform measures of credit risk and makes those measures publicly available to all market participants. Otherwise, important foundational questions regarding appropriate roles for the private and public sec- tors will remain unanswered. PATRICK SINKS has served as MGIC Investment Corporation's CEO since March 2015. He began his career with the company at its primary subsidiary Mortgage Guaranty Insurance Corp. (MGIC) in 1978 as a member of the accounting team. He earned several promotions culminating with the role of SVP - Controller and Chief Accounting Officer before being selected by the company's CEO, Curt Culver, to eventually succeed him as MGIC's leader. Sinks was then moved to the sales side of the business as SVP-Field Operations and was subsequently promoted to President and COO. Regardless of the logic in favoring conventional mortgages, the credit risk associated with government mortgages is measured differently and less stringently than the credit risk associated with conventional ones, and this means more business moves toward the FHA and away from the GSEs and private capital.

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