Congress Moves to Charge Mortgage Insurance Even With 20% Down

Published March 13, 2014

Senate Democrats and Republicans on the Senate Banking Committee have agreed in principle on a plan to unwind the nearly $5 trillion Government Sponsored Enterprises (GSEs) and to, they say, “create a mortgage insurance fund for the system to protect taxpayers against future bailouts.”

Under the proposal, S. 1217, supported by the Obama administration, lending institutions will be required to pay 10 percent equity up front, and pay into the mortgage insurance pool on top of that — a cost that will undoubtedly be passed along to borrowers.

So, right off the bat, members of Congress are implicitly stating that even if borrowers put 20 percent down on a house, that will not necessarily absolve them from paying some type of private mortgage insurance. Currently, only conventional mortgages with a loan-to-value ratio greater than 80 percent, such as FHA and VA loans but also other types, require the insurance.

By implication, that will now change with the new mortgage insurance fund being envisioned. This, in addition to the 10 percent private equity requirement, is the price to be paid for getting government out of the business of housing finance, and taxpayers off the hook for any future bailouts.

Or so say the backers of the proposal. Ranking member Sen. Mike Crapo (R-Idaho) promised the new deal would “move us toward a stronger housing system that provides a balance between providing broad access to mortgages while protecting taxpayers from losses.”

New Government Entity

The bill would create a new government entity to replace the Federal Housing Finance Agency and to administer the insurance fund, the Federal Mortgage Insurance Corporation (FMIC). It would be required to levy fees on lenders such that after five years, the fund contains 1.25 percent of the principal of loans guaranteed. That number jumps to 2.5 percent after 10 years.

Let’s assume for simplicity’s sake that all $5 trillion of the Fannie and Freddie loans are eventually sold off and rebundled as FMIC securities. Banks — awash with $2.5 trillion of excess reserves thanks to the Federal Reserve’s quantitative easing — would need to maintain $500 billion of equity to hold the mortgage paper.

In addition, after five years, the FMIC insurance fund would need to raise $62.5 billion. After 10 years, that number jumps to $125 billion through the collection of the fees. According to the bill, “The Corporation shall charge and collect a fee, and may in its discretion increase or decrease such fee, in connection with any insurance provided under this title to… achieve and maintain the reserve ratio goals.”

Paid By Everyone

Who will pay the $125 billion? Well, since millions with loan-to-value ratios greater than 80 percent must already pay for private mortgage insurance, Congress must mean everyone else.

That is, those 32.6 million estimated by CoreLogic who either put 20 percent down or whose mortgages are now worth less than 80 percent loan to value.

So, even if you did the right thing and saved so you could buy your house, it appears Congress wants to come in and abrogate your and everyone else’s contracts, forcing you to pay for mortgage insurance. Everyone knows the costs are going to be passed on to borrowers, one way or another.

In the least, there appears to be no exemption for homeowners with 20 percent equity from paying the new mortgage insurance currently owned by Fannie Mae and Freddie Mac.

Let’s assume almost every mortgage in the nation comes under FMIC’s purview. That means to cover the $125 billion, if the burden falls on the 32.6 million equitied homeowners, they could owe an additional $3,834 on their mortgages.

Oh, there will be workarounds. For new borrowers, banks will likely find ways to roll those fees into the closing costs or interest rates. For existing homeowners, there might be an incentive to do a cash-out refi to satisfy the fee requirement. Still, one way or another, everyone will have to pay.

No Bailout Vote

Even then, if we experience another big housing downturn, and investors cannot cover the $500 billion capital call, and the $125 billion insurance fund proves to be insufficient, the legislation guarantees there will be another bailout, only this time without any vote in Congress.

To wit, the bill states, “The full faith and credit of the United States is pledged to the payment of all amounts from the Mortgage Insurance Fund which may be required to be paid under any insurance provided under this title.”

So, how exactly will the bill protect taxpayers from losses? It sounds more like homeowners will pay for it first, and then if and when that doesn’t work, investors are given an explicit government guarantee — something Fannie and Freddie never had.

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