FHFA Proposal Could Raise Mortgage Costs

A recent proposal recently put forth by the Federal Housing Finance Agency (FHFA), though it intends to protect Fannie Mae and Freddie Mac from another financial crisis, could lead to higher mortgage insurance premiums for thousands of borrowers, suggests a new report released this week.

In July, FHFA announced it is seeking public comment for its draft of private mortgage eligibility requirements (PMIERs) that the government-sponsored enterprises (GSEs) would use to approve private mortgage insurers that provide mortgage insurance on loans owned or guaranteed by Fannie and Freddie.

A thoughtful effort in its nature, the proposal is not without its shortcomings, says the joint report “Putting Mortgage Insurers on Solid Ground” from Moody’s Analytics and the Urban Institute.

Authoring the repot are Moody’s Chief Economist Mark Zandi and Credit Analytics Director Cristian deRitis, along with Jim Parrott, a senior fellow at the Urban Institute.

“Several features of the rules as currently written, however, would likely unnecessarily increase costs and cyclicality in the mortgage and housing markets,” write the report’s authors.

If the proposal follows through as drafted, borrowers would end up paying an extra 0.15 percentage point in mortgage insurance premiums, whereas borrowers with low credit scores who pay a 5% downpayment could pay an extra 0.7 percentage point, while high score borrowers who pay a 10% downpayment could see their premiums fall 0.07 percentage point, reports The Wall Street Journal.

While the PMIERs has a few cause and effect areas for FHFA to consider, the report’s authors agree the proposal comes at a critical moment as the housing finance system needs to bring in more private capital and find ways to expand lending to those without the wealth to put down large downpayments.

“That is, [the housing finance system] needs a healthy and reliable mortgage industry. And the PMIERs are well-designed to provide precisely that,” the authors write.

Comments on the PMIERs proposal are due by September 8.

View the Moody’s Analytics and Urban Institute report.

Written by Jason Oliva

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