USMI’s Lindsey Johnson on Biden’s tax credit and how it impacts insurers

Below is the transcription of the interview. These transcriptions, powered by Speechpad, have been lightly edited and may contain small errors from reproduction:

Lindsey Johnson: Think about the fact that even during the global pandemic, nearly 2.4 million Americans became first-time homebuyers through 2020, about 14% higher than we saw through 2019, according to a first-time homebuyer report that Genworth Mortgage Insurance releases each year. This is a staggering number of people who were able to attain homeownership, lock-in lower interest rates, and the vast majority of these borrowers, actually more than 80% of them, were able to do so because of low down payment options that are available in the market today, such as private mortgage insurance, FHA, and other options currently in the market.

Alcynna Lloyd: Hey, “Housing News” listeners, this is Alcynna Lloyd, and I’m the producer of this weekly podcast, which is a proud member of the industry syndicate. You’ve just heard a quote from today’s guest, Lindsey Johnson, the president of USMI. In today’s episode, our host Sarah Wheeler interviews Johnson on the unique challenges currently facing mortgage insurers for principals the company considers essential to housing policy reform and whether or not Biden’s proposed first-time homebuyer tax credit could change the need for private mortgage insurance. Thank you for listening and here’s Episode 12 of Season 5 of the “Housing News” podcast.

Sarah Wheeler: Welcome everyone. This is Sarah Wheeler, editor-in-chief at HousingWire, with the latest episode of our “Housing News” podcast. I’m so excited to introduce our guest today, Lindsey Johnson, the president of U.S. Mortgage Insurers. USMI is the nation’s leading private mortgage insurance association comprising five of the six U.S. mortgage insurance companies in the country. As president of USMI, Lindsey works with member companies to advance the value of private mortgage insurance to borrowers and taxpayers, and to promote a sustainable housing finance system backed by private capital. Lindsey previously served as a director on PWC’s public policy team. And prior to joining PWC, Lindsey was a former member of the Senate Banking Committee staff as the Republican staff director for the Senate Banking Committee’s National Security and International Trade and Finance Subcommittee, and as a senior policy advisor to Senator Mark Kirk, focusing on noteworthy banking, housing finance reform, and insurance legislation. Lindsey also served as director of the Federal Home Loan Bank of Atlanta for seven years, representing the bank in DC at the highest levels of government during several key legislative reforms, including the Housing and Economic Recovery Act of 2008 and the Dodd-Frank Act. So clearly we have an incredible guest today.

Lindsey, welcome to the program.

Lindsey Johnson: Sarah, thank you for having me. I appreciate the opportunity to talk to you and your listeners.

Sarah Wheeler: We’re so excited, especially during this time. Wow, what a time. Coming off the pandemic, Joe Biden’s administration has hit the ground running, so we’re going to get into some of that. But first, you know, the first question we always ask our guests is how they got into the industry because no two stories are ever the same and so we’d love to know how you got here.

Sarah Wheeler: You know, look, almost anyone you talk to in the mortgage industry is going to have some kind of very circuitous route that they got to where they are. Very few people charted a path where they might actually land in mortgage finance, in the position they thought they would be in. I’ve listened to other HousingWire episodes, and I always find it so interesting, the different trajectories where somebody said, “I was planning to do something completely different and landed in this great place.” And my story is similar, I mean, very circuitous route. I was really fortunate to test out a wide array of things in finance and in policy, and really, those things shaped who I am and my career experience.

I began my career starting…working with a former House Republican Conference Chair J.C. Watts in the private sector and I got a taste in a number of different policy issues, and really quickly realized that, you know, wanted to focus exclusively on financial services and financial services policy. I then spent time working with the Federal Bank of Atlanta, as you mentioned. And what an interesting time for the Federal Bank and for the federal bank system, working through the financial crisis and through some of the very, you know, incredibly important legislative efforts such as the Housing and Economic Recovery Act and Dodd-Frank. And if you are in financial services, and particularly in the area of housing and policy, I really find it hard to think that you could not have been changed and shaped by the experience that you went through and that we all learned coming through the financial crisis. So that was just a tremendous professional experience that we all went through, you know.

Coming through the crisis, I, at the same time, decided I want a deeper understanding of these finance issues we were working on, so I pursued my MBA in finance at night while I worked full time at the bank. Then I always joked that, you know, I had an opportunity to take a pay cut, so I went to the Hill and just had a tremendous experience there as well, working on housing finance legislation, on terrorism insurance, just a number of different issues, that again, just really gave me a much broader and deeper understanding of policy and how policy has such a direct impact on consumers and on our ability, as industry, to do what we do.

So if I’m talking to younger people, I always just constantly remind them and I encourage, you know, anyone to have an idea of what you want to do, study, learn, work hard to do it, but then always be open to new and bigger things.

Sarah Wheeler: Well, exactly. Like when you were 10, you weren’t like, “Mortgage insurance, yes. I’m going to do that.” But incredible career. You know, you’ve just been right in the thick of things, through some of the really most important times, so great to talk to you.

So let’s get to it. You know, mortgage insurance plays a critical role in the mortgage ecosystem, even in normal times, but clearly, these have not been normal times, right. So what have been the unique challenges of fulfilling that role this year, and I would say over the last year, and how have private mortgage insurers met those challenges?

Lindsey Johnson: Well, you’re absolutely right. The past year has indeed been very challenging. Thankfully, the private mortgage insurance industry entered the crisis from a position of strength, mostly due to, you know, a number of the reforms that it underwent since the 2008 Financial Crisis. In fact, you know, 2020 was a record-setting year for the MI industry. We helped over 2 million borrowers secure home financing, that’s a 53% increase from the previous year. We supported 600 billion in mortgage origination, so really just a tremendous year. And of that volume, about 65% was new purchase volume, 35% was refinanced loans, and that resulted in about 1.3 trillion in outstanding mortgages with private mortgage insurance coverage at the year’s end. So again, just a booming year for the mortgage market generally, definitely for the private mortgage insurance industry. And obviously, you know, a lot of that growth are due to those factors that we’re pretty familiar with, which is more first-time homebuyers coming into the market with good credit. You know, we saw about 2.4, almost 2.4 million first-time homebuyers coming into the market, which is, you know, a record-setting year.

And there’s been so much discussion about millennials and the housing market, but what I would reiterate is the size of this generation. And yes, they are waiting a little bit longer, and in some cases, they’re, you know, putting other priorities before homeownership, but this has really helped a lot of those borrowers be more ready for homeownership as these opportunities come up. They’re the most educated generation we have seen, and they are really coming into this market with a lot of force. And conventional loans, backed by private MI, is a great fit for them. Because, as I mentioned before, they have good and decent credit and they may just not be able to put that full 20% down.

Second, interest rates, historic lows, and there’s been so much conversation about this and what the future might bring, but this obviously helped fuel such a, you know, market momentum through 2020, both for the purchase and the refinance market.

In terms of how the industry met the challenges presented by COVID-19, you know, we worked very closely with federal policymakers and industry groups, with consumer organizations, to support homeowners who were experiencing hardship in the wake of the pandemic, and mortgage insurers have routinely had to update their guides and their processes to align them with the GSEs’ policies to implement that nationwide forbearance programs. In fact, as mentioned, one element of the industry success and their ability to scale up for that record volume was that transformation that it underwent since the 2008 Financial Crisis, where they really developed into sophisticated, active managers of mortgage credit risk. That allowed the industry to enter the COVID-19 crisis with a tremendous amount of financial strength.

The industry is currently well-capitalized, holding more than 6.3 billion in excess of what’s referred to as a private mortgage insurance eligibility requirements or PMIERs. These are just our capital requirements that are set by the GSEs and FHFA. And that’s a sufficiency ratio. That’s a ratio above what’s required of about 149%.

So in the beginning of the crisis, you know, no one knew what was going to happen, right? We were all looking and, kind of, staring into the abyss. And the industry really began to prepare itself for what might be ahead by raising more capital, even though they entered into the crisis from a very strong capital position. So in the beginning of the crisis, you know, obviously no one knew what was going to happen. We had no idea how long this was going to last. And the different forbearance programs were still being thought of. So the industry really began to prepare herself for what might be ahead by raising more capital, even though they entered the crisis from a very strong capital position.

An important point is that during any market crisis, there’s going to be disruptions in different markets. So at some points, it’s going to be easier to raise debt for equity, depending on where the markets are. But there’s entities who are designed to be available to take mortgage credit risks through all cycles. All USMI members were able to go out and raise capital and debt, in the debt and equity markets, throughout 2020 in order to scale up and meet that increased volume. And as a result, the capital markets increased confidence in the MI industry, which furthered the ability of our members to pursue new business and support lenders and borrowers during that current market.

Another key development over the past several years has been the industry’s programmatic use of credit risk transfer or CRT transactions in order to access global capital and reinsurance markets. Since 2015, the industry issued 35 insurance-linked note deals transferring about 14.3 billion of risks on nearly 1.4 trillion of insurance in force. They also went out and executed 29 reinsurance deals since 2015, transferring almost 34 billion of risk on approximately 700 billion of insurance in force.

Sarah Wheeler: Yeah, the agility that was required over the last year is pretty incredible when you look back on it. Clearly, you know, the mortgage insurers were ready and then sprung to action really fast.

You know, speaking of fast, we have seen incredible action from the Biden administration. And USMI published a letter recently outlining four principles you consider essential as the administration and others consider housing policy reform. Can you summarize some of those four principles for us?

Lindsey Johnson: Sure. I mean, you know, they’re pretty consistent with what we’ve been saying for a number of years, which is any future housing finance system really has to be consistent with the following: It’s got to protect taxpayers. It has to promote stability in the housing finance system. It’s got to enhance accessibility, and it’s got to increase transparency. And so from a protecting taxpayers standpoint, you know, private capital has got to be the preferred method of minimizing taxpayer risk. You’ve got to try to absorb as much credit losses in front of any government guarantee, but we believe that there’s gotta be an explicit government guarantee. And that’s really where that stability comes in. Maintaining a secondary market for the 30-year fixed-rate mortgages across different housing cycles is really what the government is there to do.

And then in terms of, you know, a reform system and having broader access to mortgage finance system, we think that there are very tangible steps that this administration can and should take to make sure that borrowers have access, not just to government-backed lending programs, but to the conventional market because you’ve got more competition, you have more lenders in that market.

And then finally, to address transparency, there’s gotta be a consistent, a transparent, and a coordinated approach to the federal government’s housing policy among all the different agencies and entities. So you can’t have certain rules or consumer protections for the conventional market that don’t exist in the FHA market or in the VA market. You really have to have some consistency across those different markets.

And private mortgage insurance already plays a critical role in providing the access to mortgage credit and protecting taxpayers. So, you know, we really think that obviously, this is going to be a critical piece going forward, for that smooth transition in housing finance reform.

Sarah Wheeler: You know, the Biden administration’s focus on helping first-time homeowners and underserved borrowers, in general, has already resulted in quite a lot of legislative and executive action, right, and there’s more to come. So regarding the proposed first-time homebuyer tax credit, do you think that’s a gamechanger for people with lower incomes or first-time homebuyers, and how would that change the need for private mortgage insurance?

Lindsey Johnson: Well, so, I mean, I can unpack that just a bit. So first, it’s important to know that homeownership has been on the rise over the past few years, even during the COVID-19 pandemic, as I mentioned before, but a deeper look at who is becoming homeowners reveals just how difficult it can be for some homebuyers to break into the market, and it highlights some of those racial and economic gaps that still exist. So U.S. Census data for the third quarter of 2020, when we last looked, showed so that homeownership among whites was, you know, over 75% compared to nearly 51% for Hispanic households and 46% for black households. And, you know, minority borrowers who are qualified for home financing might encounter those additional costs. There are just a number of things that are, kind of, standing as barriers for many of these borrowers.

We also know COVID-19 has compounded the racial and economic gaps for millions of low to moderate-income families who lost their jobs and they’re facing financial insecurity. Urban Institute and many other groups have looked at these issues and are finding that these borrowers are much more likely to face financial hardships and are at much greater risk of not being able to pay their rent or their mortgage payment due to the impacts of the pandemic. So we’ve got to focus on the pandemic and its impact on borrowers, and particularly minority borrowers, and we know that the Biden administration is doing that and we are going to continue to support them in those efforts.

We also have to continue to focus on the impact of the pandemic to renters who have lost their savings, and they’re trying to make it through the pandemic, because these impacts may not be fully visible yet, but they will have significant implications for the current and future rates of homeownership.

Regarding some of those other policy ideas you put forward, and you mentioned the 15% homebuyer tax credit that’s been proposed, we think that there’s a lot of merit to many of these different ideas, including this one. I mean, obviously, you know, one of the biggest challenges for affordability is supply. So as policymakers think about these issues, it’s going to be essential to consider the severe lack of affordable housing supply, which is the lowest level this century, with just 1.9 months of supply at the beginning of 2021, and I was looking at some of the data, the most recent data, and depending on what economists you look at, you know, the deficit of new homes coming into the market is somewhere between 1 million to 2.5 million houses that we’re in, you know, shortage of supply. I think Freddie Mac’s numbers suggest there’s about a 2.5 million housing shortage in the country.

And that shortage is especially acute in the lower end of the market where first-time homebuyers are looking for that starter home. So the lack of supply, in turn, has led to, you know, record year-over-year home price appreciation, which was almost 11%, according to FHFA’s latest report, and the strongest home price appreciation, again, is, sort of, in that lower end of the market, which is just creating a bigger challenge for those individuals to break into the market.

And so anything that we can do to address the supply issue is going to help with the affordability. And things like, you know, first-time homebuyer tax credits, again, have a lot of merit. I think that they actually can do a lot of good for, you know, very targeted set of the population, but you’re also… You know, it’s all a balloon. And if you’re squeezing the side of the balloon, the demand increases, the supply issue has not been addressed, and so you could create some additional imbalances.

You know, we’ve looked at other proposals where you can create incentives for sellers to sell, especially in a certain segment of the market. And we think that those are proposals that really deserve some research and some looking into those.

I also work very closely with Habitat for Humanity in Northern Virginia, and I can tell you that one of the biggest challenges is local zoning laws. And so supply and zoning, you know, all of these things are feeding into this really massive issue of not having affordable supply on the market.

And so anything that we can do from a federal level to really incentivize sellers, to rehabilitate homes, to sell their homes, especially in that one segment of the market where, you know, it’s, sort of, that starter supply. anything that we can do to encourage, you know, renovation and bringing more supply back onto the market in certain markets is, you know, all going to help with the affordability challenge.

Sarah Wheeler: Really love that point they’re about, you know, the aging housing stock and the possibility of bringing some of those back online. I think, it’s just under appreciated in general and not thought about as much. So I love hearing that. You know, the HUD Secretary Marcia Fudge recently announced that HUD has no near-term plans to change FHA’s mortgage insurance premium pricing. You know, could you bring us up to speed there, like, from your perspective, what does that mean? What does that indicate to you about the financial health of some of the borrowers or just the financial health of our system? I would love to get your input there.

Lindsey Johnson: Well, look, I think that, you know, one, we are encouraged to see HUD continue to really focus on the borrowers that are impacted by the pandemic. We see the light at the end of the tunnel, right? We see more vaccines coming into the market and the economy, kind of, recovering. And we see the jobs numbers that are looking way better than they have over the last six months. But we also understand the FHA’s market has been impacted. We see their seriously delinquent rates at pretty significant levels, right? And so those are all things that we really applaud the administration and Secretary Fudge for focusing on the borrowers and the relief and the support that they’re going to need over the coming months.

You know, as you mentioned, Secretary Fudge did decide to maintain FHA’s current pricing of mortgage insurance premiums and cited the seriously delinquent rates and the impact to FHA’s book and the need to really focus on helping those tens of millions of borrowers who are impacted. We also think that it’s really prudent policy to understand, again, sort of the borrowers that are being supported right now and, sort of, what implications it may have for lowering premiums, stoking demand in the market, and driving those prices even further up. So we’re hopeful that the administration continues to take a holistic view and to encourage, you know, access to both conventional and FHA mortgage lending, and also balance, sort of, what the demand and the supply aspect is in the market so that we can really promote something that’s going to be sustainable homeownership for the longer term.

Sarah Wheeler:Yeah, great point there, on the sustainability. And I think you said it earlier too, you know, we’re not just looking for this cycle, we’re looking for housing policy that’s going to serve the industry and consumers well, you know, long term. And I just think that that’s a great view. I think it’s an interesting view because we are so cyclical and if you’re in the weeds in the industry, oftentimes, you can… You know, last year, you just had to, you know, put your head down and do all those refis. Then this year, you’re looking at, okay, how am I going to do all those purchases? And I just think that when it comes to policy, we have to just look out so much farther. So interesting there. You know, when you see all the opportunities of this unique time we’re in, where there seems to be real consensus and focus on lower-income borrowers, at least it seems that way to me, what are the one or two things you would be most excited about if they actually happened?

Lindsey Johnson: Well, I think, the renewed focus on lower-income and minority borrowers is absolutely right. And let’s see if we can correct some of these inequities and also continue our focus on sustainably increasing minority homeownership. And so, you know, we wanted really focus on addressing those longer-term systemic issues that have unnecessarily increased costs and created barriers for minority homeownership. We think that there is an ability for our industry to really partner with some of the other organizations and lenders and others out there who are also focused on these same topics. Because from an underwriting perspective, we know that there is, you know, an ability to really sustainably bring these borrowers into the market, but understanding that, you know, whether it’s a millennial borrower or a low to moderate-income borrower, all of these borrowers have different challenges and barriers to enter into the market, and how do we, sort of, manage that mortgage credit risk prudently while also using data-driven and targeted approaches to reduce those barriers, especially for black and Hispanic households.

Also, I’m really excited about the focus on this first-time homebuyer, you know, population. And again, you think about the fact that even during the global pandemic, nearly 2.4 million Americans became first-time homebuyers through 2020, about 14% higher than we saw through 2019, according to a first-time homebuyer report that Genworth Mortgage Insurance releases each year. This is a staggering number of people who were able to obtain homeownership, lock-in lower interest rates, and the vast majority of these borrowers, actually more than 80% of them, were able to do so because of low down payment options that are available in the market today, such as private mortgage insurance, FHA, and other options currently in the market.

So, you know, we really have focused on how do we work with, how do we partner with federal policymakers and what they’re aiming to do. And we think, you know, very targeted low down payment programs, down payment assistance programs, again, could be very viable option for many borrowers, but there’s a lot of access in the market right now. And, you know, you think about the borrowers who are being helped, 60% of purchased loans in a [inaudible 00:23:34.993] for first-time homebuyers, more than 40% of those borrowers have annual incomes of $75,000 or less. This is, you know, really a population of borrowers that everybody is, sort of, focused on. So that fundamentally underscores the point of the MI serves, that key demographic, low down payment borrower.

Sarah Wheeler: And we’re just going to say, to your point, with the demographics coming for the next four or five years, that’s the flood of new homebuyers, right? It’s those first-time homebuyers. And so it’s going to be really interesting. It’s an exciting time to be in the industry. I’m sure it’s an exciting time for you to be advocating for the mortgage insurers. And so we really appreciate you coming on and sharing your insights with us.

Lindsey Johnson: Sarah, thanks for having me. We really appreciate the opportunity.

Sarah Wheeler: We’re going to be keeping our eye on these policy initiatives and also on what USMI is doing. Thanks again.

Lindsey Johnson: Thanks, Sarah.

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