Argues Regulators' QRM Rule Will Shift More Housing Risk to Government and Taxpayers, Without Significantly Improving Loan Performance
RICHMOND, Va., Aug. 1, 2011 /PRNewswire via COMTEX/ --
Mortgage loans with down payments as low as five percent, with proper underwriting and mortgage insurance, do not expose borrowers, investors, or the broader housing market to undue risk and should be included in federal regulators' definition of a Qualified Residential Mortgage (QRM), said Genworth Financial (NYSE: GNW).
In a comment letter filed last week with the six federal financial regulatory agencies responsible for defining QRM, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Genworth said the regulators' current proposed definition of a QRM will crowd private capital out of housing finance and force all low payment lending to the Federal Housing Administration (FHA), increasing the financial risk to taxpayers.
Genworth said the regulators' proposed 20 percent, or alternative 10 percent down payment options under QRM are too narrow and won't significantly improve loan performance. They are, however, likely to result in substantially higher costs and reduced availability of mortgages for otherwise creditworthy families, which will prolong the housing market slowdown.
"There is a proven model for responsible, safe low down payment lending, and it includes requiring some borrower down payment, performing a thorough prudential underwrite of the borrower, and obtaining mortgage insurance to mitigate the risk of default," said Kevin Schneider, president of Genworth's U.S. Mortgage Insurance business.
"The regulators' QRM proposal ignores other factors to focus primarily on requiring a large down payment. Low down payment mortgages performed safely prior to, and during the current housing market crisis and should not now be subjected, unnecessarily, to the higher costs associated with risk retention," Schneider said.
Genworth proposed its own definition of QRM that includes loans with down payments as low as five percent and total debt-to-income ratios of 45 percent. Genworth said its proposal will materially increase the number of borrowers who have access to an affordable, safe QRM, while still resulting in loans that perform 54 percent better than loans purchased by the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, and 77 percent better than conventional mortgage loans, even under extreme economic stress. For loans originated from 2001 to 2008, the overall default rate for QRMs under Genworth's proposal would have been only 1.20%. Genworth's full comment letter can be viewed at: http://www.restorethedream.com.
Genworth cited new independent research which confirms that mortgage insurance significantly reduces the risk that a mortgage will become delinquent and go into default. Federal regulators specifically asked whether mortgage insurance contributes to a lower frequency of mortgage default in the proposed QRM rules issued in March 2011.
The study by Promontory Financial Group of nearly 5.7 million mortgages originated between 2003 and 2007 found that throughout the housing crisis, low down payment loans with mortgage insurance exhibited significantly lower default rates than uninsured low down payment loans with a simultaneous or "piggyback" second mortgage. Uninsured first mortgages with a piggyback second mortgage were the most prevalent alternative used over the past decade to avoid the requirements for mortgage insurance or credit enhancement that allowed a loan to be sold to the GSEs.
The Promontory study showed that:
- The cumulative default rate over six years for uninsured low down payment first mortgage loans with piggyback second mortgages was nearly 21 percent greater than for comparable low down payment loans with mortgage insurance.
- Insured low down payment loans became seriously delinquent 32 percent less often than low down payment loans with piggyback second mortgages.
- Of loans that did become seriously delinquent, insured loans returned to current status (cured) 54 percent more often than loans with piggyback second mortgages.
- Borrowers with insured mortgages were able to remain in their homes 40 percent more often than those with piggyback second mortgages.
Genworth wrote that the narrow QRM, together with the exemption from risk retention provided for the FHA and recognition of the GSE guarantee as risk retention, will force virtually all low down payment lending to the FHA, or, for the foreseeable future, to the GSEs. This will limit borrowers' choices and raise their costs, while expanding the role of government and increasing the financial risk to taxpayers. Such an outcome is counter to the Administration's stated goals of decreasing the role of the government in housing finance and returning to a market that primarily is capitalized by private sector investment.
Genworth also urged regulators to focus on the intent of Congressional sponsors of the QRM legislation who considered - and deliberately rejected - including a minimum down payment requirement. To date, 54 Senators and more than 300 House members have expressed concern that regulators ignored their intent that the QRM standard should include low down payment mortgages enhanced by private mortgage insurance.
"Original legislative language and subsequent comments from members of Congress make clear that QRMs are not intended to be riskless loans," said Schneider. "They are meant to be loans that, when they predominate, will facilitate a strong, stable residential mortgage market driven by the origination and securitization of prudently underwritten, sustainable mortgage loans with traditional terms and features that perform well in any economic cycle. The Promontory study proves that low down payment loans with mortgage insurance fulfill this role."
To ensure that these stable mortgages predominate in the market, Genworth said it is prepared to perform its own, independent underwrite of every mortgage loan that it insures, and recommended that the regulatory agencies require that all mortgage insurers underwrite all insured QRMs in order to satisfy the definition of QRM.
Genworth wrote that other potential negative impacts of the current QRM proposal include:
- On average, only 17 percent of loans originated from 2001-2010 would have met the Agencies' proposed QRM standard.
- In 2010, approximately 80 percent of first-time buyers would have been excluded by the 20 percent down payment requirement, and about 70 percent would have been excluded even if the down payment requirement was reduced to 10 percent.
- Some estimate that non-QRM loans will cost borrowers 70-100 basis points more than QRM loans.
"The very narrow QRM definition proposed by federal regulators would unnecessarily place the costs of risk retention on the backs of creditworthy borrowers, instead of, as Congress intended, on the books of mortgage originators and securitizers who engage in the risky practices that caused the current housing crisis," said Schneider.
Genworth reminded regulators that mortgage insurance represents material amounts of private capital and reserves in a first-loss position that are committed for the long term to support the mortgage market. While mortgage insurance mitigates investor losses, it does not entirely eliminate them, which gives loan originators incentive to properly underwrite each loan.
Genworth also noted that while the mortgage insurance industry currently is under stress, its countercyclical model is working as designed, paying on all claims that arose during the downturn. As in past cycles, as housing stabilizes, the industry has begun to replenish its capital base through higher earned premiums and lower claims paid. However, Genworth wrote, restoring the market balance between private mortgage insurers and the FHA, by including prudently underwritten loans with mortgage insurance in the definition of QRM, is critical to returning more private capital to the housing market.
About Genworth Financial
Genworth Financial, Inc. (NYSE: GNW) is a leading Fortune 500 insurance holding company dedicated to helping people secure their financial lives, families and futures. Genworth has leadership positions in offerings that assist consumers in protecting themselves, investing for the future and planning for retirement -- including life insurance, long term care insurance, financial protection coverages, and independent advisor-based wealth management -- and mortgage insurance that helps consumers achieve home ownership while assisting lenders in managing their risk and capital.
Genworth has approximately 6,500 employees and operates through three segments: Retirement and Protection, U.S. Mortgage Insurance and International. Its products and services are offered through financial intermediaries, advisors, independent distributors and sales specialists. Genworth Financial, which traces its roots back to 1871, became a public company in 2004 and is headquartered in Richmond, Virginia. For more information, visit Genworth.com. From time to time, Genworth releases important information via postings on its corporate website. Accordingly, investors and other interested parties are encouraged to enroll to receive automatic email alerts and Really Simple Syndication (RSS) feeds regarding new postings. Enrollment information is found under the 'Investors' section of Genworth.com.
SOURCE Genworth Financial