Does Private Mortgage Insurance Have a Place in the New Mortgage Order?

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It's no surprise that the private mortgage insurance industry is fighting hard against proposed new risk retention rules for the mortgage industry.

They are already trying to pick themselves up and dust themselves off from the near knockout punch the Federal Housing Administration (FHA) gave them, when the government mortgage insurer took over their market share while saving the housing market from complete and total bust.

The FHA became the only game in town for the less credit-worthy borrowers with lower down payments. Now, just when the private guys are trying to get back in the game, they're getting battered again.

The proposal for a "Qualified Residential Mortgage," which would be exempt from 5 percent risk retention by the banks, which of course the banks don't want to retain, requires, among many things, that the buyer put 20 percent down on the home.

“We do not believe that affordability and sustainability are mutually exclusive goals,” Kevin Schneider, president of the Mortgage Insurance Companies of America testified before Congress yesterday (he's also CEO of U.S. Mortgage Insurance of Genworth Financial ). “We understand the drivers of sustainable, affordable homeownership because the private MI industry has a vested interest in assuring that low down payment homebuyers purchase homes with loans that they can afford to pay over time.”

The FHA is exempt from QRM, so low down payment borrowers have to go there in the current market environment; there's really nowhere else. Fannie Mae and Freddie Mac may be exempt from QRM, but that is still in question, and they are requiring higher down payments these days as well. Mortgage insurers are happy for Fannie and Freddie to be exempt from QRM, as long as they are under government conservatorship, because many of those borrowers get private mortgage insurance. But once the two are out of conservatorship, which is the big push, then they are no longer exempt from that 20 percent down payment, or so goes the theory.

“A return to private capital in the new home finance structure is crucial. Privately insured mortgage loans should be included in the QRM definition to be given parity with FHA-insured loans," stressed Schneider.

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