The outlook for U.S. housing is improving, despite policy risk from Washington. Lawmakers and regulators, for all of their rhetoric, have done little more than tighten mortgage credit, most notably by enacting the Dodd-Frank Act's "ability to repay" (ATR) and "skin in the game" mandates. And they've kept their focus on refinancing for way too long, rather than on the resuscitation of home purchases.
As was discussed during a House hearing on Wednesday morning, lenders' concerns about "putback" risks, or being forced to repurchase loans that were sold to the federal housing agencies, have led them to require credit overlays even on federally guaranteed Federal Housing Administration loans. Along with upfront fees for refinancing Fannie and Freddie loans, this has priced many first-time homeowners out of the market.
Federal Reserve Governor Elizabeth Duke highlighted the numbers in a speech last Friday: "From late 2009 to 2011, the fraction of individuals under 40 years of age getting a mortgage for the first time was half of what it was in the early 1990s." There's a chicken-and-egg argument about the tightened lending standards and plummeting household formation, but whichever came first, it's hardly rock-and-roll time for mortgage bankers.
And this dynamic is only slowly changing, as crucial "qualified mortgage" and "qualified residential mortgage" safe-harbor exemptions from the ability-to-repay and risk-retention rules appear to be stalled. Meanwhile, the refinancing wave is nearing an end.
Despite all of this, anyone looking for a positive play on housing finance reform, regardless of the pace of events in Washington, should consider the private mortgage insurers, which have already had huge up moves this month. Genworth Financial (GNW) is up 23%, MGIC Investment (MTG) is up 70%, and Radian Group (RDN) is up 15%, compared with 10% gains on the Dow and S&P 500.
Mortgage insurers, long perceived as under-capitalized, disrespected and all but left for dead, have found new life as the FHA has raised premiums to deal with the insolvency of its reserve fund, and Hill Republicans are agitating for even further curbs to the agency's reach and market share.
That was the topic of Wednesday morning's House Financial Services Committee hearing, titled "Mortgage Insurance: Comparing Private Sector and Government-Subsidized Approaches." As impressed as I was with former FHA official Brian Chappelle's depiction of the agency as having played a flex role throughout the workout of the housing crisis -- and arguably helping to save, not back out, the mortgage insurers -- the unambiguous agenda of the majority Republicans was clear.
Committee Chairman Jeb Hensarling (R., Texas) and his compadres clearly want to reduce the FHA's competitive advantages, which they say are driving private-sector mortgage insurers out of the marketplace, "leaving homebuyers with fewer choices."
Meanwhile, although the GOP highlighted that the FHA handled more than 57% of all insured mortgages in 2012 and mortgage insurers only 18%, the mortgage insurers' share had already nearly doubled to 35% by the fourth quarter. Throw in a successful capital raise or two, and a March 5 upgrade from Barclays (predicting a near doubling of Genworth's stock before it even reaches book value), and you might understand the buzz in this sector.
Here's why a view from Washington might make the mortgage insurer's stocks, like the objects in your rearview mirror, closer to a good buy than they may appear.
First, President Obama's fiscal 2014 budget is expected to come out the week of April 8. The administration is either going to have to acknowledge that the FHA needs a first-time-ever federal bailout to cover the $16.3 billion shortfall its actuary flagged last November or risk looking like it is papering over the issue. Either way, the Republican squeezebox is not going to let FHA advocates sleep at night, and the focus on better times ahead for the mortgage insurers might only intensify.
Then there's the issue of the qualified mortgages and qualified residential mortgages. Qualified mortgages, which will shield lenders who adhere to tight new standards in order to underwrite safe loans, stop short of requiring minimum down payments. For the mortgage insurers, that is a far better standard than the 20% down payment required under the related but separate (draft) qualified residential mortgage rule that debuted a year ago.
Meanwhile, there has been a growing chorus -- including Fed Governor Daniel Tarullo and Chairman Ben Bernanke -- to synch the two standards by deeming the qualified mortgage to equal the qualified residential mortgage. However, that would require legislation, which may be a tall hurdle. In the meantime, lenders face risks due to the D.C. Circuit Court's Canning v. NLRB decision, which could throw all of the Consumer Finance Protection Board's decisions since January 2012 -- including the qualified mortgage -- into question.
In any event, if all of the above doesn't intrigue you, a tiebreaker might come compliments of the Fannie-Freddie regulator, the Federal Housing Finance Agency. That agency's controversial but effective acting director, Ed DeMarco, has been forced to walk a tightrope as Treasury and Hill Democrats have tried to force him to free up Fannie and Freddie to engage in principal forgiveness under a federal program called HAMP, and perhaps to further ease terms under the increasingly successful Home Affordable Refinance Program, or HARP.
DeMarco has resisted such pressures, despite threats of termination, because he saw more benefit in carefully balancing the mandates to both "conserve" taxpayer resources and "maintain" housing activity. And he has gone one step further, ordering Fannie and Freddie to begin building a unified platform to consolidate and upgrade their back-office operations. He has also ordered the government-sponsored enterprises to begin issuing debt that includes slices that carry no federal insurance. This would be a signal opportunity for the mortgage insurers, which have long been tethered to Fannie and Freddie but might now benefit as the GSEs themselves become less tethered to the government.
