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They may not see eye-to-eye on how mortgage giants Fannie Mae and Freddie Mac can best provide equitable access to home ownership, but two U.S. lawmakers who are on opposite sides of the aisle have taken up the cause of private mortgage insurers that the mortgage giants rely on.
House members Blaine Luetkemeyer and Emanuel Cleaver of Missouri have joined a chorus of lending industry groups in urging the Securities and Exchange Commission (SEC) to tread carefully as it moves to root out conflicts of interest that regulators say contributed to the 2008 subprime mortgage meltdown and financial crisis.
The SEC in January proposed a rule that’s designed to prevent the many parties involved in pooling assets like mortgages into securities from taking positions against the investors who buy those securities. The rule would prohibit “conflicted transactions,” such as selling those same securities short or purchasing credit default swaps that pay returns if the securities lose value.
The problem with the proposed rule, lending industry groups say, is that it could hinder a system that private mortgage insurers have used to transfer nearly $68 billion in risk since 2015, freeing up capital that they can use to insure more mortgages backed by Fannie and Freddie.
Fannie and Freddie typically require that borrowers making down payments of less than 20 percent obtain private mortgage insurance. If borrowers default, the insurance helps the mortgage giants keep payments flowing to investors who buy mortgage-backed securities (MBS) from them. Private mortgage insurers absorb some of the losses before Fannie and Freddie — or taxpayers — have to step in.
But the massive surge in claims that private mortgage insurers faced in the aftermath of the 2008 financial crisis made it difficult for some to meet the capital requirements needed to continue writing new business. Since then, private mortgage insurers have developed a more foolproof system of “reinsuring” themselves by issuing mortgage insurance-linked notes (MILNs).
Pleas to regulators
In their May 23 letter to SEC Chair Gary Gensler, Luetkemeyer and Cleaver asked that the commission add language to the rule clarifying that it will not apply to MILNs and that the notes are not “conflicted transactions.”
“In a MILN transaction, the private mortgage insurer remains responsible for payment on the mortgage insurance policies in the pool, retains risk on the mortgage insurance policies that is not insured by the reinsurance agreement, and is only entitled to recover its actual losses incurred under the mortgage insurance policies,” the House lawmakers wrote. “As a result, there is alignment of interest between the parties in MILN transactions since both private mortgage insurers and investors are incentivized for borrowers to be, and remain, successful as homeowners.”
All six national providers of private mortgage insurance — Arch, Enact, Essent, MGIC, NationalMI and Radian — submitted a similar collective plea to the SEC as part of its rule-making proceeding. So did lending industry trade groups including the Mortgage Bankers Association and Housing Policy Council.
In a Thursday blog post, executives with U.S. Mortgage Insurers (USMI), an industry trade group, highlighted the role that the companies they represent play in housing finance.
In 2022, USMI estimates that private mortgage insurers helped over 1 million families purchase or refinance a home, and the industry supported nearly $402 billion in mortgage originations. By the end of the year, the private mortgage insurance industry insured approximately 5.7 million mortgages totaling $1.512 trillion.
“Conventional loans with [mortgage insurance] and mortgages insured by the FHA are the two primary methods for American families to attain homeownership with down payments of less than 20 percent,” USMI Chairman Adolfo Marzol said. “Policymakers really need to consider that both private [mortgage insurance] and FHA have a critical place in a well-functioning housing finance system.”
Unlikely allies with clout in Congress
While allied in their support for private mortgage insurers, Luetkemeyer is a Republican and Cleaver is a Democrat, and the two have differing views on Fannie and Freddie’s proper role in housing finance.
Last week, Luetkemeyer grilled Sandra Thompson, the head of Fannie and Freddie’s federal regulator, on controversial fee changes which he’d previously claimed would force “homebuyers with good credit scores to subsidize the mortgage costs of people who do not have good credit scores.”
Cleaver, who was Kansas City’s first Black mayor and has served in Congress since 2004, last fall wrote Thompson a thank-you letter for the Federal Housing Finance Agency’s decision to eliminate upfront fees for many first-time homebuyers who don’t exceed income ceilings.
One thing Luetkemeyer and Cleaver do have in common is seniority in Congress, which has helped them land seats on influential House committees. A former bank examiner who was first elected to Congress in 2008, Luetkemeyer serves on House Financial Services Committee and is the ranking member of the House Committee on Small Business.
Cleaver, who is serving his 10th term in Congress, also serves on the House Financial Services Committee, where he’s the ranking member on the Subcommittee on Housing and Insurance.
Those committee assignments make getting the ear of Luetkemeyer and Cleaver an important priority for lending industry groups. According to OpenSecrets, a nonprofit that tracks campaign spending and lobbying, lender trade groups have been major backers of both candidates’ past election campaigns.
During the 2022 campaign cycle, Luetkemeyer received $69,210 in campaign funding from groups that promote the interests of mortgage bankers and brokers — the second-highest total of any House lawmaker. Cleaver ranked fourth, with $58,000 in funding from mortgage trade groups backing his successful 2022 reelection campaign.
Although it’s not a major player in election finance, USMI’s political action committee (PAC) has contributed to both candidates’ campaigns. In the 2020 election cycle, the PAC contributed $1,000 to Cleaver’s and $1,500 to Luetkemeyer’s reelection bids and another $1,000 to Luetkemeyer in 2022.
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Matt Carter
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