I am Roger Haughton, Chairman and Chief Executive Officer of PMI Mortgage Insurance Company, headquartered in San Francisco California. I am also a past president of the Mortgage Insurance Companies of America (MICA), the trade association representing the mortgage insurance industry. I am pleased to represent MICA today to discuss ways the mortgage insurance industry expands the availability of affordable housing loans. While MICA is not advocating any particular legislation, we hope that the information I provide helps you in the legislative process to expand homeownership opportunities in this country.
Below, I briefly describe how the mortgage insurance industry expands homeownership and then discuss who the industry believes are the future participants in affordable housing programs. Finally, I describe how the industry has worked with lenders, the government sponsored enterprises and community groups to develop affordable housing programs and how those programs should be structured in the future.
What is Private Mortgage Insurance
The business of mortgage insurance is the business of making homeownership more affordable. By enabling people to buy homes with as little as three percent down, mortgage insurance expands the number of eligible homeowners.
Protect lenders and investors from loss - Without mortgage insurance, simple analysis shows that lenders and investors would suffer significant losses on defaulting loans with low down payments. The expenses associated with default and foreclosure generally total 15 percent to 20 percent of the loan amount. In addition, if a foreclosed property is resold for less than its original sales price even greater loss occurs.
Recognizing the near certainty of losses on most foreclosures, lenders generally will not make a loan with less than a 20 percent down payment unless it has mortgage insurance protection. The industry generally insures the top 20 percent to 30 percent of the loan amount. With mortgage insurers assuming the top layer of risk, lenders and investors are more likely to expand their underwriting guidelines so that more people can buy homes.
Common interest with borrowers - A mortgage insurer acts as a review underwriter for the lender of the credit and collateral risk of the mortgage. While the mortgage insurer never sees the borrower, it reviews the information collected by the lender. The mortgage insurer and homebuyer share a common interest in the mortgage transaction because they each stand the greatest risk of loss in the event of default. The borrower will lose the home and the equity in it and the insurer will have to pay a claim. As a result, both the insurer and borrower have a vested interest in making sure that the borrower not only can afford to buy the home but can afford to keep it.
There are seven companies in the industry and last year we insured $189 billion worth of mortgages, representing almost 1.5 million homeowners. In the last 30 years, mortgage insurers have helped almost 20 million families obtain mortgages and have insured $1.7 trillion in mortgages.
Financially strong for the future - The industry has the financial strength to meet the challenges of expanding homeownership in the future. As of the end of 1999, the industry's net risk-to-capital ratio was 13.5 percent, indicating that $1 of capital has been set aside for every $13.5 of risk. All the companies in the industry are rated either AA or AAA in their claims paying ability by the national rating agencies. This strong capital base enhances lenders' ability to serve a broader array of homebuyers and provides additional strength to investors during economically challenging times.
Since this is the best of economic times, it is difficult to appreciate the need to have a private industry financially able to take the first dollar loss on the riskiest mortgages -- low down payment mortgages. However, if economic downturns occur in the future like those that occurred regionally in the 1980s and early 1990s, the mortgage insurance industry is well positioned to help facilitate a steady stream of mortgage money for affordable housing loans. In the last two decades the members of MICA paid more than $15 billion in claims to the government sponsored enterprises, federally insured depository institutions and others. They continue to have the financial strength to do so in the future.
The Face of Affordable Housing in the Future
Who are homeowners - It is widely reported that homeownership rates are at an all time high. In fact, according to the U.S. Census Bureau, 67.4 percent of Americans own their own home as of the first quarter of 2000. Unfortunately, this high rate of homeownership is not evenly distributed among racial and income groups. Only 47.4 percent of African Americans and 45.7 percent of Hispanic Americans own their home. White Americans, on the other hand, enjoy a 73.4 percent homeownership rate.
Lower income people also are less likely to be homeowners. Only 51.4 percent of people earning less than median income own a home while 81.4 percent of families earning median income or higher own a home. Similarly, potential first time homebuyers are struggling to buy homes. Between 1982 and 1999 the rate of homeownership in households aged 25 to 29 dropped from 38.6 percent to 34.7 percent and in households aged 30 to 34 it declined from 57.1 percent to 53 percent.
The value of homeownership - It is vital for families and neighborhoods that the private sector promote homeownership. I have the privilege of also serving as Chairman of Social Compact, the Washington, D.C.-based organization that fosters private sector investment in inner-city neighborhoods. In my dual capacities as Chairman of PMI and Social Compact I know first hand the benefits that homeownership can provide in terms of neighborhood stability and a strengthening of civic responsibility. Homeowners have a tangible investment, not only in their own home and their personal success, but also in the success of their communities. This tangible stake benefits the entire community.
Similarly the affordable lending needs of rural communities must also be addressed. Substandard housing in rural areas, as well as a shortage of affordable housing, and fewer financing choices, are too often the situation in our nation's rural areas.
Who should be targeted - The key to expanding homeownership is to focus on those people who today are having difficulty buying a home. These groups include minorities, immigrants, low-income people and families living in rural and inner city areas. In fact, according to a study commissioned by PMI and performed by RFA, a Pennsylvania-based economic consulting firm, one third of the first-time homebuyers in the coming decade will be immigrants and minorities. Programs designed with their special needs in mind will expand homeownership. Discussed below are some of the ways mortgage insurers have helped meet those needs and how they will continue to do so in the future.
Mortgage Insurers Role in Affordable Housing
History - As noted above, the nature of the mortgage insurance business is to make homeownership more affordable. A decade ago, mortgage insurers began to partner with lenders, community groups, state housing finance agencies, and the government sponsored enterprises to expand homeownership opportunities even further by developing creative affordable housing programs for specific communities. The goal of these partnerships was to teach the participants how to expand homeownership while minimizing defaults. All of the partners wanted to ensure that new homeowners could afford to keep their homes not simply purchase them.
Essentially "demonstration" programs were developed for specific communities. For example, some programs were targeted to a particular inner city community while another program was targeted to a particular type of family, such as single parents with dependent children or families earning less than 115 percent of area median income. The partners in the mortgage also experimented with different underwriting requirements. For example the normal required reserves of two mortgage payments might have been waived or reduced. Similarly, borrowers might have been able to prove their willingness to repay their mortgage through nontraditional methods of credit verification, such as utility payments. Many of these changes in underwriting guidelines proved so successful that they were incorporated into the daily underwriting guidelines of the partners in the mortgage.
Programs of PMI Mortgage Insurance Company today - Today the mortgage insurance industry continues to work with the same partners to make homeownership more affordable. Some of the recent programs of PMI Mortgage Insurance Company, include the following:
Homeownership for Native Americans - PMI has been extremely active in expanding homeownership opportunities for Native Americans in fulfillment of a corporate objective that grew out of a personal commitment I made during a Habitat for Humanity build that PMI participated in during the summer of 1994. In July of 1994 a team of PMI employees built a home for the Garcia family, members of the Cheyenne River Sioux, living on the tribe's reservation in South Dakota. The Garcia family home was part of a Habitat for Humanity-Jimmy Carter work project to build 30 homes on the reservation in one week. Mr. and Mrs. Garcia and their five children had been living in a tent before the PMI employees, and the Garcia's, built their home. That experience, and the housing conditions I observed on the reservation, caused me to make a personal commitment that led to PMI devoting its efforts to expanding homeownership opportunities for Native Americans as a primary objective for our company.
To date we have issued $65 million in commitments to insure home loans for Native Americans, which translates to over 300 Native American families achieving homeownership. These commitments permit as little as a one percent down payment. PMI has utilized a program we developed called "layered co-insurance" in our Native American initiative whereby we agree to insure loans that: feature low down payment requirements; permit down payment contributions from relatives or non-profit groups; have expanded debt to income and mortgage payment to income ratios; and recognize non-traditional sources of income and credit. In return for this enhanced flexibility the Native American tribe shares a portion of the risk with PMI and posts collateral as part of that agreement. The four tribes that we have negotiated such agreements with have utilized 1996 Native American Housing Assistance and Self-Determination Act (NAHASDA) funds to fulfill their collateral requirements, and to offer down payment and closing cost assistance, usually in the form of low-interest second mortgages, to tribal members. Using this money in this manner has permitted the tribes to leverage their NAHASDA funds in a very creative manner and to spread the benefits of homeownership more broadly than otherwise might be the case.
All of these agreements have been done in conjunction with lender and investor partners, whose participation has been vital to the success of these efforts. In several of the agreements the originating lender has been a Native American-owned mortgage broker, First Americans Mortgage. The first agreement that we entered into -- with the Chickasaw Nation of Oklahoma -- was the subject of an award from Social Compact, the organization referenced earlier in this testimony. The PMI-Chickasaw Nation agreement also received a Best Practices Award from the U.S. Department of Housing and Urban Development (HUD).
PMI has issued commitments to four Native Americans tribes - the Chickasaw Nation of Oklahoma, the Choctaw Nation, Citizen Potowatomi and the Cherokee Nation. We have two additional commitments pending - with the Apache and the Menonome.
Jim and Mary Cooper, members of the Cherokee Nation, are fairly typical of the Native American families that have benefited from the agreements that PMI has entered into with Native American tribes to expand homeownership opportunities. "This program has been like a holiday miracle for my family," said Jim Cooper, a self-employed truck driver and the father of three children, ages five to 12. By taking advantage of the Native American Initiative's low-down payment option, the Coopers used less than $900 of their own savings to purchase a five-bedroom, three-bathroom home in Bartlesville, Okla. for $89,900. The Coopers' financing package included a 97 percent, 30-year, fixed-rate 7.875 percent loan originated by First Americans Mortgage Corp. and insured by PMI. They also obtained a 1.9 percent, five-year second mortgage from the Housing Authority of the Cherokee Nation to cover the remaining two percent of the down payment and the closing costs.
None of the loans we have insured to date have been secured by homes located on reservation land, due to questions of clear title in the event of a default on the mortgage. However we believe we have resolved those issues and will be in a position shortly to insure mortgages secured by homes located on Native American reservations. Furthermore, PMI announced last week a partnership with Wells Fargo Mortgage, one of the largest lenders in the country, to expand homeownership opportunities for Native Americans through a unique program that will involve: the development of mortgage products designed specifically to meet the needs of Native Americans; marketing and outreach to Native Americans; and joint arrangements with Native American tribes, with the objective of significantly increasing home lending to Native Americans living both on and off reservations.
Inner City Homeownership - Our inner-city communities are highly diverse and frequently characterized by below average rates of homeownership. PMI recently announced an initiative designed to foster increased homeownership among a growing segment of many inner city neighborhoods - resident immigrants. PMI's initiative, called the Gateway Cities Initiative, is designed to expand homeownership opportunities for inner-city residents in cities that are viewed as ports of entry for immigrants -- Oakland, Chicago, Houston, Los Angeles, Tampa, New York, Seattle, Charlotte, Boston and Washington D.C.
We launched the Gateway Cities Initiative in January 2000 with a pilot project in Oakland, California in partnership with the Unity Council, a community-based organization whose efforts and services are targeted primarily, but not exclusively, to inner-city Hispanic residents. PMI is providing money to establish a revolving loan fund that will be used to acquire and rehabilitate inner-city homes to be sold to neighborhood residents. Once the home is sold, the proceeds will return to the revolving fund to be used to acquire and rehabilitate additional homes. The neighborhood residents that purchase the homes will receive pre- and post-purchase counseling to ensure their readiness to assume the obligations of homeownership. When this pilot effort is complete, PMI will expand this initiative to the other targeted cities. We are seeking community-based, non-profit organizations and lenders to be our partners in these other targeted cities.
Rural Lending - To address the issue of affordable housing in rural areas, PMI has entered into a $350 million commitment with Chase Manhattan Mortgage Corporation to insure loans under the Rural Advantage Program, which features low down payment requirements, custom underwriting guidelines and special eligibility requirements customized to meet the needs of rural homebuyers.
Rural Advantage loans feature a 3 percent down payment requirement, allow seller contributions to be used for down payment and closing costs, and offer expanded qualifying ratios as compared to U.S. Department of Agriculture home lending program. The loans offer a fixed rate for the first ten years, converting to an adjustable rate thereafter. Rural Advantage loans are available to residents of rural areas whose income does not exceed 150 percent of area median. Non-traditional credit sources will be taken into account in the underwriting of the loans and all buyers are required to participate in pre-purchase homebuyer education. Rural Advantage loans are available in all rural areas that are eligible for the USDA Guaranteed Rural Housing Program, plus additional areas designated by Chase Home Mortgage.
The Rural Advantage Program is designed to be a conventional financing alternative for rural borrowers and to expand their home financing options. The Rural Advantage Program has been available for approximately one year and approximately 500 rural families have attained homeownership with loans under this program. Chase and PMI recently announced expanded nationwide geographic availability of the program.
Formula for Successful Affordable Housing Programs
As the discussion of specific programs above indicates, there are several elements of a successful affordable housing program. Some elements the mortgage insurance industry believes are important include the following:
Risk sharing is also important to minimize defaults. A goal of any affordable housing programs is to not only put people into homes but to ensure that they can continue to afford them far into the future. Numerous studies show the devastating affects of excessive foreclosures on neighborhoods. If each party to the transaction stands to lose money if the borrower defaults then they are more likely to work up-front to ensure the borrower can afford the loan.
The mortgage insurance industry, working with their lender partners, have made significant strides in affordable housing. Obviously more has to be done, but I hope you will find the advancements we have made both meaningful and insightful as you consider legislation.
One final note. Even with all this effort some portions of our population may be beyond the ability of the private sector to provide homeownership opportunity. For those people, an organization such as Habitat for Humanity, which PMI is a proud and long-time supporter of, assists families to achieve their homeownership aspirations through sweat equity, corporate sponsorship of building costs and donations of time and material. PMI has sponsored nine Habitat Homes and I have personally led employee crews to build each and every one of those homes. Habitat's goal is the elimination of substandard poverty housing in America, a goal we warmly endorse and share.
In closing let me thank the members of the subcommittee for their time and attention. We are committed to creating homeownership opportunities for everyone who is able to assume the obligations of owning a home in the belief that homeownership leads to stronger families and stronger communities. I will be pleased to answer any questions you might have.
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