There was a time back in 2007 when FHA had a 3% to 5% market share in the mortgage insurance sector. Private mortgage insurance (PMI) companies and their trade association were fearful of an FHA reform foray into their market space. Shortly thereafter, most PMIs on their own, abandoned the high LTV, low FICO score market— borrower space the FHA owned for decades (pre-700 average FICO score we see today).

Despite what you may be thinking now, their recalcitrance was borne of the short-lived venture by the FHA into risk-based premium pricing in an effort to remain financially sound.  They were so concerned back then they asked Congress (and got) a one-year moratorium on FHA implementing any form of risk-based pricing, a move which about ran FHA into the ground. 

Fast forward to present day.  Most PMIs are on life support and FHA is taking on more and more risk everyday as they try to stabilize the entire mortgage market.  So why not create a hybrid risk-sharing program between FHA and the PMIs?  When I was Commissioner we entertained such a proposal that was presented to us by a large PMI company.  Given the onerous requirements around the approval and implementation of public-private partnerships, the proposal never got off the ground.

Conceivably, FHA, while still holding a larger portion of the overall risk, would bear a smaller portion than they do now and thus potentially pay a lower dollar amount to the lender should the loan go to claim. A smaller portion of the risk would be held by a PMI company who also would receive premium income like FHA does.  In a perfect world, FHA’s increasing risk exposure would be diluted somewhat by the PMI co-insurer. While many PMI firms are having difficulty writing new policies due to their own financial challenges, there are several new unencumbered PMIs coming online that are very well capitalized and positioned to take market share. 

People that cannot afford 20% down on a house, but have a decent credit score, and underwrite successfully, could still turn to PMIs for a lower upfront and possibly a lower annual premium.

Traditionally, the PMIs have insured the safest of the low to moderate-income loans, leaving the more credit-challenged borrowers and riskier loans for FHA to insure. After all, they had the flexibility to adapt to the market and set their pricing.  Circumstances in today’s mortgage market may have a turned that paradigm in its ear, but that’s okay—this new and bold partnership could also determine things like which entity bears which portion given a particular borrower’s risk profile in addition to other risk factors.

It is time to consider spreading the wealth—and the risk.