Three predictions for mortgage affordability in 2015
On January 22, 2015, the Urban Institute’s Housing Finance Policy Center and CoreLogic co-hosted a seminar titled Mortgage Insurance: Premiums, Capital, and Accessibility. With Faith Schwartz of CoreLogic moderating, a panel of four experts from the government, private, and non-profit sectors addressed a range of issues related to mortgage insurance. Three general predictions emerged during the discussion: recently proposed rules won’t raise mortgage insurance prices significantly, there is room to reduce the GSE guarantee fees, and whatever happens in coming months, borrowers are likely to benefit:
- The new rules for Private Mortgage Insurers (PMIs) won’t raise mortgage insurance prices much. The Federal Housing Finance Agency (FHFA)—the conservator of the Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac—is currently in the process of updating the overall requirements (including capital requirements) for PMIs to become eligible to do business with the GSEs. The proposed rule, known as the Private Mortgage Insurer Eligibility Requirements or PMIERs, is expected to be finalized in the first half of 2015. It would require PMIs to hold more capital to protect themselves and the GSEs against future losses. While this will likely increase the price borrowers pay for mortgage insurance, some panelists predicted such increases won’t have a major impact on overall affordability for two reasons:
- The average premium increase will be limited. According to Mark Zandi, chief economist at Moody’s Analytics, “Premium increases from PMIERs won’t raise costs much.” Moody’s estimates that the average increase in premiums due to higher PMI capital requirements would be no more than a modest 0.15 percent (or 15 basis points).
- The hardest hit borrowers don’t use PMI as much. While the PMIER rule could lead to significant premium increases for low-FICO borrowers, such borrowers overwhelmingly obtain Federal Housing Administration (FHA)-insured rather than GSE-guaranteed loans, and should therefore be minimally impacted by increases in the price of PMI. For example, more than 70 percent of FHA’s 2014 originations had FICO scores of less than 700 compared with just 22 percent for GSE originations (Exhibit 1). Furthermore, after the recently announced 0.5 percent cut in FHA premiums, we expect FHA financing to be more cost effective than GSE and PMI financing, regardless of FICO score. This will steer even more borrowers towards FHA mortgages – further mitigating the effects of higher PMI premiums under PMIERs.
- The guarantee-fees charged by Fannie Mae and Freddie Mac could be reduced. FHFA is also currently assessing whether the guarantee-fees charged by GSEs should be reduced. These “g-fees,” which averaged roughly 0.2 percent of the loan amount prior to the housing bust, have more than doubled to well over 0.5 percent in recent years. According to recent Urban Institute research, the current level of g-fees— which is set by FHFA, not market-based—is higher than the fees implied by GSEs’ recent risk-sharing capital market transactions. Ed Golding, a senior advisor with the U.S. Department of Housing and Urban Development added, “We will not know the level of market based g-fees until we have housing finance reform.” After the housing bubble, the FHFA directed the GSEs to increase their g-fees, partly to cover the risk that PMIs would not be able to pay out their share of claims ahead of the GSEs. But higher capital requirements under the PMIERs discussed above should bolster the loss absorption capacity of PMIs, and therefore render at least a portion of current g-fees unnecessary. According to Zandi, there is a “better-than-even probability” that FHFA will lower g-fees in some form.
- Whatever the resolution on remaining issues, borrowers should benefit. While a reduction in the price of government-backed mortgages would certainly benefit borrowers, according to Rohit Gupta, president and CEO of Genworth, it would also make it difficult for PMIs to compete with FHA, and more importantly, would increase barriers for attracting more private capital. Laurie Goodman, director of the Urban Institute’s Housing Finance Policy Center, further added that industry dynamics would continue to evolve in 2015 given FHA’s recent premium cut and FHFA’s upcoming rules on PMIERs and g-fees.
These developments suggest that FHA, the GSEs, and PMIs will have to recalibrate as they try to find the new industry equilibrium over the coming months. While it is hard to predict what that equilibrium would look like, it seems likely that borrowers will benefit under most outcomes.
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