Private mortgage insurers are ready to play a role in the housing finance market, but that won't happen until federal housing agencies strike the appropriate balance between private insurers and the Federal Housing Administration, industry representatives claim.
Experts met on Wednesday and suggested to members of the House Financial Services Committee that private mortgage insurers have the ability to play a significant role in mortgage finance. However, for that to happen, Fannie Mae and Freddie Mac’s global footprint needs to shrink.
"FHA has dominated the mortgage insurance market due to housing policies and practices that provide competitive advantages to FHA while crowding out private capital in the form of private MI," said Teresa Bazemore, president of Radian Guaranty (RDN).
Many borrowers lean toward FHA loans because privately insured loans purchased through the GSEs are more expensive, Bazemore explained.
As a result, the Radian president believes one way to get private MI back in the game is to allow more flexibility for FHA premiums.
"In order to adequately protect the FHA fund and the taxpayer and to avoid an unfair government price advantage compared to the private sector, Congress should provide FHA with additional authority to adjust its premiums to levels that reflect the true risk of the loans that it insures," the president stated.
Stephen Stelmach, senior vice president and research analyst for FBR Capital Markets, also believes in adjusting FHA premiums. Though it sounds counterintuitive, Stelmach says higher premiums could increase mortgage availability.
Since the FHA mortgage space is continuing to decline while private MI is slowly increasing, the FHA can direct its attention toward less creditworthy households that currently have limited access to credit, widening mortgage availability, Stelmach explained.
"Under this scenario, we see the FHA fulfilling an important policy objective of providing mortgage credit to underserved borrowers while private capital becomes increasingly available to meet growing mortgage market demand," he added.
Kenneth Bjurstrom, principal and financial consultant for Milliman, also recommended that the FHA evaluate and adopt various private mortgage insurance standards, specifically the MI's accounting provisions.
Bjurstrom also advised FHA to better understand and modify its risk exposures and "retain the necessary capital that is required to protect the program now and for the next economic downturn that will most definitely occur again," he said.