According to U.S. Mortgage Insurers, expanding the use of mortgage insurance for front-end credit risk transfer “can offer substantial benefits for taxpayers, lenders of all sizes, and borrowers.”
According to USMI, the use of mortgage insurance can make sure that loss protection is available in good financial times as well as bad – unlike a dependence on back-end investors, who may shy away from buying into mortgage pools if the economy takes a downturn. All sizes and types of lenders have equal access to mortgage insurance, and expanded mortgage insurance would make credit risk transfer costs more transparent, “enhancing borrower access to affordable mortgage credit.”
“By design, and as evidenced by the more than $50 billion in claims our industry paid during and since the financial crisis, mortgage insurance provides significant first-loss risk protection for the government and taxpayers against losses on low-down-payment loans,” said Lindsey Johnson, president and executive director of USMI. “As the government explores ways to further reduce mortgage-related risk while also ensuring that Americans continue to have access to affordable home financing, experience shows that mortgage insurance is the answer, particularly when you consider mortgage insurance protection is at work before the risk even reaches the GSEs’ balance sheets.”
Mortgage insurance also has more direct benefits for individual borrowers than back-end credit risk transfer, Johnson said.
“In addition to the specific goal of shifting more risk from Fannie Mae and Freddie Mac – and unlike back-end CRT – mortgage insurance plays a direct role in helping families with good credit, but who don’t have large down payments, qualify for a mortgage,” Johnson said. “For nearly 60 years, mortgage insurers have been leaders in helping millions of Americans – particularly first-time homebuyers – purchase homes in an affordable way.”
The Federal Housing Finance Agency is looking for ways to shield Fannie Mae and Freddie Mac – and taxpayers – from losses from mortgage-related risks. Currently, credit risk transfer is largely handled by selling mortgage pools to private investors – so-called “back-end credit risk transfer. But another possible strategy, advocated by a mortgage insurance industry group, is “front-end” credit risk transfer – accomplished through private mortgage insurance.