Mortgage insurers have friends in high places on both sides of the aisle
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They may disagree on how mortgage giants Fannie Mae and Freddie Mac can best ensure equal access to home ownership, but two U.S. lawmakers on opposite sides of the aisle echoed private mortgage insurers’ view that the mortgage giants rely on.
Rep. Blaine Lutkemeyer and Emanuel Cleaver of Missouri have joined a chorus of credit industry groups urging the Securities and Exchange Commission (SEC) to act cautiously in an effort to root out conflicts of interest that regulators say contributed to the subprime mortgage collapse in 2008 and financial crisis.
In January, the Securities and Exchange Commission proposed a rule designed to prevent many parties involved in bundling assets such as mortgages into securities from taking positions against investors buying those securities. The rule forbids “conflicting transactions” such as selling the same short securities or buying credit default swaps that pay a return if the securities lose value.
The problem with the proposed rule, credit industry groups say, is that it could thwart the system that private mortgage insurers have used to transfer nearly $68 billion of risk since 2015, freeing up capital they can use to insure more mortgages. loans secured by Fannie and Freddie.
Fannie and Freddie usually require that borrowers making a down payment of less than 20 percent get private mortgage insurance. In the event of default by borrowers, insurance helps mortgage giants keep payments flowing to investors who buy mortgage-backed securities (MBS) from them. Private mortgage insurers cover some of the losses before Fannie and Freddie or the taxpayers get involved.
But the massive surge in claims that private mortgage insurers faced in the aftermath of the 2008 financial crisis has made it difficult for some to meet the capital requirements needed to continue building new businesses. Since then, private mortgage insurers have developed a more reliable “reinsurance” system through the issuance of Mortgage Insurance Linked Bonds (MILNs).
Appeals to regulators
In their May 23 letter to SEC Chairman Gary Gensler, Lutkemeyer and Cleaver asked the panel to add language to the rule clarifying that it would not apply to MILN and that the bonds were not “conflicting transactions.”
“In the MILN transaction, the private mortgage insurer remains liable for the payment of the mortgage insurance policies in the pool, retains the risk on the mortgage insurance policies that are not insured under the reinsurance contract, and is only entitled to reimbursement of its actual losses incurred under the reinsurance contract. . mortgage insurance policies,” House lawmakers wrote. “As a result, the interests of the parties in MILN transactions converge, since both private mortgage insurers and investors have an interest in ensuring that borrowers are and remain successful homeowners.”
All six national private mortgage insurance providers—Arch, Enact, Essent, MGIC, NationalMI, and Radian—have filed a similar class action lawsuit with the SEC as part of its rulemaking process. So did the lending industry trade groups, including the Mortgage Bankers Association and the Housing Policy Council.
In a blog post released Thursday, executives from industry trade group US Mortgage Insurers (USMI) highlighted the role the companies they represent play in housing finance.
USMI estimates that in 2022, private mortgage insurers have helped more than 1 million families purchase or refinance a home, and the industry has supported almost $402 billion in mortgage origination. By the end of the year, the private mortgage insurance industry had insured about 5.7 million mortgages totaling $1.512 trillion.
“Conventional loans with (mortgage insurance) and FHA-insured mortgages are the two main ways for American families to purchase homes with a down payment of less than 20 percent,” said USMI Chairman Adolfo Marzol. “Politicians should really consider that both private (mortgage insurance) and FHA have an important place in a well-functioning housing finance system.”
Unlikely allies with influence in Congress
Although Lutkemeyer supports private mortgage insurers, he is a Republican and Cleaver is a Democrat, and they have different views on the proper role of Fannie and Freddie in housing finance.
Last week, Lutkemeyer questioned Sandra Thompson, head of federal regulator Fannie and Freddie, about controversial fee changes that he previously argued would force “good credit homebuyers to subsidize mortgage costs for people with bad credit.” . ”
Cleaver, who was Kansas City’s first black mayor and has served in Congress since 2004, wrote Thompson a thank you letter last fall for the Federal Housing Finance Agency’s decision to waive down payments for many homebuyers who are below the income ceiling. .
Lutkemeyer and Cleaver have one thing in common – seniority in Congress, which helped them get seats on powerful House committees. A former banking inspector first elected to Congress in 2008, Lutkemeyer sits on the House Financial Services Committee and is a senior member of the House Small Business Committee.
Cleaver, who is serving his 10th term in Congress, also sits on the House Financial Services Committee, where he is a senior member of the housing and insurance subcommittee.
These committee assignments make getting the attention of Lütkemeyer and Cleaver a high priority for lending industry groups. According to OpenSecrets, a nonprofit that tracks campaign and lobbying spending, creditor trade groups have been major backers of both candidates’ past campaigns.
During the 2022 campaign cycle, Lutkemeyer received $69,210 in campaign funding from groups that promote the interests of mortgage bankers and brokers, the second-highest total of any House legislator. Cleaver came in fourth with $58,000 in funding from mortgage trade groups backing his successful 2022 re-election campaign.
Although the USMI Political Action Committee (PAC) is not a major player in election finance, it has contributed to the campaigns of both candidates. In the 2020 election cycle, the PAC contributed $1,000 to Cleaver’s re-election, $1,500 to Lutkemeier’s re-election, and another $1,000 to Lutkemeier’s re-election in 2022.
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