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CHLA backs FHFA rules on PMI capital requirements

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                                                                                                                      September 4, 2014
Hon. Mel Watt
Federal Housing Finance Agency
400 7th Street SW
Washington, DC 20024
FHFA Request for Input – Draft Private Mortgage Insurer Eligibility Requirements (PMIERS) for
Fannie Mae and Freddie Mac Counter-parties
Dear Director Watt:
The Community Home Lenders Association (CHLA) writes to offer our comments in response to the Request for Input on FHFA’s draft Private Mortgage Insurer Eligibility Requirements (PMIERS). We offer these comments in our capacity as the only national association exclusively representing nonbank mortgage bankers.
We applaud the FHFA for pursuing the objective of ensuring that Private Mortgage Insurers (PMIs) have sufficient capital to meet their financial responsibilities with regard to Enterprise loans. While it is our understanding that PMIs have made good on over 95% of their obligations on GSE problem loans arising out of the 2008 housing crisis, it is important for FHFA to thoroughly examine this issue, and to establish appropriate PMI capital standards to cover counter party risk on Enterprise loans.
However, the CHLA has concerns that these capital standards should not be disproportionate or excessive in relation to the actual counter party risk they seek to address. Capital standards which are excessive could limit the availability or raise the cost of needed lower down payment home purchase Enterprise mortgage loans, and could also retard the development of the use of risk sharing with PMIs, a development that CHLA considers important in transferring risk from taxpayers to the private sector.
Therefore, the CHLA writes to suggest that FHFA consider revisions to its draft capital standards, as appropriate to make them more commensurate with the level of counter-party risk, and consider modifications that include more clearly differentiating among lower LTV risk levels, giving appropriate credit for uncollected and as yet unearned premiums, and giving appropriate credit for seasoned loans.
Importance of PMIs to the Home Purchase Market
Our nation’s housing markets continue to be in a fragile state. Over the last few years we have generally experienced a stabilizing of local housing markets, with price improvements that have recovered to some extent from the depth of the 2008 housing crisis. However, there are still relatively high levels of properties moving through the foreclosure process. And a disproportionate percentage of home purchases are all cash, by historical standards, in some cases as a result of a purchase for rental strategy, with the intent and need to sell to homebuyers over the next five years.
In this environment, it is critical that there exist a deep and affordable source of mortgage loans, particularly for first time homebuyers, who generally require a relatively lower down payment. Unfortunately, the meager private MBS market, to the extent it exists, overwhelmingly provides loans to more affluent home buyers and in the form of lower LTV loans, including for move-up and refinance purposes. FHA is an important source of home purchase loans, but cannot carry the entire burden of meeting first-time homeownership needs.
The Enterprises have historically and will continue to play a critically important role in providing mortgage credit for home purchases, including for first-time homebuyers, who have lower down payment capabilities and therefore require higher LTV loans. And, higher LTV Enterprise loans generally require the use of private mortgage insurance, to cover the risk at such higher LTV levels.
Therefore, PMI capital standards which are excessive could have a number of adverse consequences with respect to the Enterprise home purchase market. These could include raising the cost of the loans that are made (as a result of higher PMI charges that reflect the cost of carrying additional and unnecessary capital) and also potentially limiting the depth of insurance available to support lower down payment loans.
Importance of PMIs to Development of a Vibrant Risk Sharing Market
CHLA has written previously to express concerns about both legislative and FHFA pilot efforts to utilize risk sharing which overly rely on a capital markets approach, due to our concerns that this could lead to undue market concentration. Moreover, CHLA strongly supports the use of an up-front risk sharing model using private mortgage insurance or some other similar guarantee, on a loan level basis, with deeper coverage, taking risk down to lower LTV levels than has historically been provided.
CHLA has concerns that unnecessarily high PMI capital standards could tie up capital in that market sector – a sector we believe could meet the needs of a more universal and effective risk sharing model.
CHLA also has concerns about the fact that the draft standards do not differentiate between the risk levels below 85% LTV, treating all levels of exposure comparably below these levels. Under a PMI risk sharing approach that covers risk at much lower LTV levels (E.g., down to 50%) this would create unnecessary and excessive capital standards, which could hinder the development of such a product.
Potential Modifications to the Draft Standards
In assessing the appropriate levels of PMI capital standards with respect to Enterprise counter-party risk, CHLA would suggest that FHFA look into three types of concerns that we understand may exist with respect to the draft standards, and make appropriate changes to address these concerns:
* As noted just above, the draft standards do not distinguish among different risk levels for exposure below 85% of loan value, notwithstanding that the lower LTV risk portions pose a lower risk of loss.
* The draft standards do not give credit for uncollected and unearned premiums on loans already underwritten.
* The draft standards do not give appropriate credit for the seasoning of performing loans.
We thank you for consideration of these comments.
Sincerely Yours,