Did you know that there is away to avoid paying monthly mortgage-insurance, even if you have less than 20% equity or downpayment? Watch today’s video!
Why do many complain about mortgage insurance? Because it’s expensive, and sometimes difficult to get rid of when it’s no longer necassary. If that’s the case, why do I say it’s good for buyers and the economy? Because it’s a tool that allows people to buy a home with less than twenty percent down.
The single biggest hurdle for home buyers is accumulating an adequate down payment. Lenders want buyers to put twenty percent down for two reasons. First, a buyer with a large down payment is less likely to quit making their payments. Second, if a buyer does default, the more the buyer put down usually means more equity in the house when the lender forecloses, which means the lender loses less money.
But, if a buyer wants to buy a $200,000 and has to put up a twenty percent down, that will equal a $40,000 down payment! Hard to save up, for most buyers. BUT, with the use of mortgage insurance, that buyer might be able to put as little as $6,000 down! A lot easier to save.
So, mortgage insurance can be a very benficial tool.
With that being said, don’t let your lender shoehorn you into only considering monthly mortgage insurance. There are other options such as single premium mortgage insurance, or “split” mortgage insurance. These programs can be more expensive up front, but sometimes much less expensive over time. They don’t work for everyone, but they certainly should be looked into.
- The Basics of Private Mortgage Insurance (choiceofhomes.com)
- Mortgage Insurer’s Bankruptcy Will Make It Harder To Get Loans (huffingtonpost.com)
- We Can’t Afford the Down Payment – What Down Payment? (adohomes.com)
- PMI Group files for Chapter 11 bankruptcy (seattletimes.nwsource.com)
- PMI Group files for Chapter 11 bankruptcy (sfgate.com)
- Mortgage Guaranty Insurance – Market Collapsing, Insurers Next?, by Gavin Magor, Weissratings.com (oregonrealestateroundtable.com)
- Mortgage Insurer Wilts (zimtelegraph.com)
- Mortgage Insurance Premium Deduction (MIP) Reminder (doraldigs.wordpress.com)
This week, President Obama announced that the Federal Housing Finance Agency (FHFA) would be extending the Home Affordable Refinance Program (HARP) to an estimated additional one million homeowners. In practice what this means is that homeowners that have a Fannie Mae (OTCBB: FNMA) or Freddie Mac (OTCBB: FMCC) backed loan and owe more than 125% of the value of their home may qualify for a restructuring.
Mortgage insurers were pummeled by claims in the first half of the year, losing $2.4 billion in the six months through June–$618 million in the first quarter plus another $1.7 billion in the second quarter. The third-quarter numbers are not yet available; however, with no sign of significant improvement in the economy for the remainder of the year it appears that 2010 losses will be matched in 2011.
Gavin Magor, senior financial analyst at Weiss Ratings, has more than 25 years of international experience in credit-risk management, insurance, commercial lending and analysis. He leads the firm’s insurance ratings division and developed the methodology for Weiss’ Sovereign Debt Ratings.
Given the state of the mortgage guaranty market, will the insurers even be there to support these loans, or more broadly, any loans?
The mortgage guaranty industry is dominated by six insurance groups. Subsidiaries of MGIC Investment Corporation (NYSE: MTG), Radian Group (NYSE: RDN), Genworth Financial (NYSE: GNW), PMI Group (NYSE: PMI), American International Group (NYSE: AIG) and Old Republic International Corporation (NYSE: ORI) wrote 93% of the $4.4 billion of premiums in 2010 with just five companies writing 80% of the total.
These same companies also recorded $1.7 billion or 71% of the combined $2.4 billion losses. United Guaranty Residential Insurance Co (an AIG subsidiary) is the only large insurer that recorded a profit during 2010 and for the first two quarters of 2011. Mortgage Guaranty Insurance Corp (MGIC) recorded a profit in 2010 after reserve adjustments.
Mortgage Insurance Companies of America, a group representing the major mortgage insurers, reports that new insurance written increased each month from April through August. It is this business that reflects an improved borrower profile according to the insurers and is expected to perform better than the pre-2008 policies.
On the downside, it reports that primary defaults have increased each month since March and the cure rate, reflecting the resolution of defaults, has declined as many months as it has improved, but the trend is down. A report from RealtyTrac on October 13 reported that first-time defaults rose 14% between July and September 2011 over the prior quarter. Consequently, in-force insurance declined on a month-by-month basis, since February, down a total of $27.1 billion or 4.4% to $598.6 billion at the end of August.
Earned premiums dropped 7.9% during 2010, with the larger insurers dropping 9.1%. With $3.5 billion out of the $4.4 billion of premiums earned by the largest insurers, only Radian Guaranty Inc experienced a rise in premiums, increasing 3.5%. The remainder experienced declines anywhere from 6.4% to 21.6%.
Capital and surplus reported by mortgage insurers dropped 7% from the first to second quarters of 2011, and $1 billion or 13% since December 2010. Assets declined $608 million or 2.3% between March and June.
Two substantial groups, PMI and Old Republic, wrote 24.6% of 2010 earned premiums but were forced to effectively withdraw from the market at the end of the third quarter of 2011. Two PMI subsidiaries were placed into receivership by the state insurance regulator. One, PMI Mortgage Insurance Company, recorded 11.6% of the total mortgage premiums earned in 2010.
The market for mortgage guaranty paper has therefore shrunk. The line of business is not profitable at this stage for the majority of insurers. The concern is that the losses will continue to grow and, with limited growth in real estate sales requiring mortgage insurance, there will be additional withdrawals from the market and or potential failures.
Two of the largest mortgage insurers are Mortgage Guaranty Insurance Corporation (MGIC), a subsidiary of Mortgage Guaranty Insurance Corp. and Genworth Mortgage insurance Corporation (Genworth), a subsidiary of Genworth Financial Inc. These two companies, ranking first and third respectively in market share, hold 35% of the market with Radian sandwiched in between.
Despite the apparent similarities, they could not have more disparate approaches and confidence in the mortgage guaranty market. Both companies write only one line of business and both increased their market penetration in 2010, but the similarities end there. MGIC represents 72% of the assets of its parent while Genworth only represents 2.5% of its parent and thus is not the major focus of the group. This difference in relevance within each group is demonstrated in the contrasting approaches to the current market difficulties.
- MGIC slightly increased its market penetration during 2010, from 22.9% to 23.1%, despite a 7.3% fall in earned premiums from $1.1 billion to $1.02 billion. This increase did not translate into profits however. Only a $619 million release ofclaims reserves prevented a loss in 2010. It’s noteworthy though that MGIC was profitable for each of the “Great Recession” years of 2007 to 2009.
- Although MGIC recognizes that the loan origination market is not growing, it contends that it is positioned to operate in the restricted market and that it is sufficiently capitalized to take advantage of the better quality business now available.
- Like MGIC, Genworth slightly increased its market penetration during 2010, from 11.7% to 11.9%, despite a 6.4% fall in earned premiums from $558.2 million to $522.6 million. Unlike MGIC it recorded losses in each of the years from 2008 to 2010.
- On the other hand, Genworth sees that the future of the mortgage insurance market lies in the regulatory and legislative actions taken to change the real estate market. It recognizes that there could be some industry consolidation.
What these two insurers appear to be demonstrating clearly is that whether the mortgage guaranty business is core to a group or not the odds are currently stacked against them because of the legacy business.
Mortgage insurers have traditionally, like most property and casualty insurers, earned substantial income from investments. A drop in investment income should be expected to continue based on the current interest rate environment and bond pricing, drying up this revenue source
The investment dilemma is a challenge for all P&C insurers. There is a growing reliance on investments for profits; at the same time there are reduced yields in the current investment environment. With unsustainable underwriting losses, insurers must navigate among undesirable alternatives: 1) seeking higher investment returns by purchasing riskier securities; or 2) increasing premiuns at the risk of dampening demand for mortgages
This is another area where MGIC and Genworth have differed. Genworth has increased its junk bond investments from 1.7% of its total portfolio in 2008 to 3.4% in 2010. This is in line with the general trend among all P&C insurers. MGIC has, on the other hand, reduced its junk holdings which has resulted in an annualized decline of 21% in investment income putting additional pressure on the profitability of the main underwriting business.
Something has to give and, as we saw in the third quarter, both PMI and Old Republic International Corp were forced to stop writing new policies due to insufficient capital. PMI is on the brink of collapse, and two subsidiaries were seized by the regulator in September. Despite opportunities to write more, and presumably profitable, business with a smaller competitive field it seems reasonable to assume that there will be additional insurers that withdraw from the market, are seized by regulators, or are sold.
Genworth appears to be a prime example of a company in the wrong place at the wrong time and it could be jettisoned by its parent sooner rather than later. MGIC on the other hand IS the business and appears to be girding its loins for the fight ahead, hoping that it will be able to successfully get through the unprofitable pre-2008 book of business and emerge stronger, with a profitable book of new business and positioned to take advantage of future recoveries in the housing market.
- MGIC, Radian Rally on New Policy Sales as Rivals Falter (businessweek.com)
- Genworth Continues to Disappoint (fool.com)
- PMI Group Unit Seized by Arizona Agency, to Pay 50% on Claims (businessweek.com)
- Are These Former Heroes Going to Zero? (fool.com)
- Genworth Shares Plunged: What You Need to Know (fool.com)
- Is Genworth Financial the Perfect Stock? (fool.com)
- MGIC’s Woes Multiply on Rising Mortgage Losses (dailyfinance.com)
- Genworth Continues to Disappoint (dailyfinance.com)
- Regulators Take Over Mortgage Insurer (online.wsj.com)
- MGIC Investment Shares Plunged: What You Need to Know (fool.com)
- Ariz. regulators seize PMI Mortgage Insurance Co. (usatoday.com)
In short, a HomePath mortgage allows prospective homebuyers to get their hands on a Fannie Mae-owned property (foreclosure) for as little down as three percent down.
And that down payment can be in the form of a gift, a grant, or a loan from a nonprofit organization, state or local government, or an employer.
This compares to the minimum 3.5 percent down payment required with an FHA loan.
HomePath financing comes in the form of fixed mortgages, adjustable-rate mortgages, and even interest-only options!
Another big plus associated with HomePath financing is that there is no lender-required appraisal or mortgage insurance.
Typically, private mortgage insurance is required for mortgages with a loan-to-value ratio over 80 percent, so this is a pretty good deal.
HomePath® Buyer Incentive
Fannie Mae is also currently offering buyers up to 3.5 percent in closing cost assistance through June 30, 2011.
But only those who plan to use the property as their primary residence as eligible – second homes and investment properties are excluded.
Finally, many condominium projects don’t meet Fannie’s guidelines, but if the condo you’re interested in is owned by Fannie Mae, it may be available for financing via HomePath.
Additionally, some of these lenders work with mortgage brokers, so you can go that route as well.
In summary, HomePath might be a good alternative to purchasing a foreclosure through the open market.
And with flexible down payment requirements and no mortgage insurance or lender-required appraisal, you could save some serious cash.
So HomePath properties and corresponding financing should certainly be considered alongside other options.
But similar to other foreclosures, these homes are sold as-is, meaning repairs may be needed, which you will be responsible for. So tread cautiously.
- Purchase a Fannie Mae Owned Home (meatlessmortgage.com)
- New Incentives To Buy A Fannie Mae Foreclosed Home By Bold Real Estate Group (boldrealestategroup.wordpress.com)
- 3 Simple Questions to Get the Right Mortgage (godfreyrealtygroup.wordpress.com)
- Fannie Mae Offering More Relief for Military Families (vabenefitblog.com)
- Fannie Mae Announces 3.5 Percent Buyer Assistance on HomePath(R) Properties Incentive Part of Continuous Effort to Stabilize Neighborhoods – CNBC (kentuckyfirsttimehomebuyer.com)
- Fannie Offers Closing Cost Help for REOs (reowablog.wordpress.com)
- Buyers Receive up to 3.5% Toward Closing Costs from Fannie Mae! (theraleighmortgageguy.com)
- Fannie vs. Freddie Earnings; Loan Limit Reduction Ahead; Jumbo Market Chatter; Think Tank Opinion on GSEs, by Rob Chrisman. Mortgage News Daily (oregonrealestateroundtable.com)
As part of ongoing efforts to strengthen the Federal Housing Administration’s (FHA) capital reserves, FHA Commissioner David H. Stevens has announced a new premium structure for FHA-insured mortgage loans increasing its annual mortgage insurance premium (MIP) by a quarter of a percentage point (0.25) on all 30- and 15-year loans. The upfront MIP will remain unchanged at one percent. This premium change was detailed in President Obama’s fiscal year 2012 budget and will impact new loans insured by FHA on or after April 18, 2011.
“After careful consideration and analysis, we determined it was necessary to increase the annual mortgage insurance premium at this time in order to bolster the FHA’s capital reserves and help private capital return to the housing market,” said Stevens. “This quarter point increase in the annual MIP is a responsible step towards meeting the Congressionally mandated two percent reserve threshold, while allowing FHA to remain the most cost effective mortgage insurance option for borrowers with lower incomes and lower down payments.”
The proposed change was announced last week as part of the Obama Administration’s report to Congress, which outlined the Administration’s plan to reform the nation’s housing finance system. The Administration’s housing finance plan also recommended that Congress allow the present increase in FHA conforming loan limits to expire as scheduled on Oct. 1, 2011.
This premium change enables FHA to increase revenues at a time that is critical to the ongoing stability of its Mutual Mortgage Insurance (MMI) fund, which had capital reserves of approximately $3.6 billion at the end of FY 2010. The change is estimated to contribute nearly $3 billion annually to the Fund, based on current volume projections. It is vital that HUD take action to ensure that FHA will continue to serve its dual mission of providing affordable homeownership options to underserved American families and first-time homebuyers while helping to stabilize the housing market during these tough times.
On average, new FHA borrowers will pay approximately $30 more per month. This marginal increase is affordable for almost all homebuyers who would qualify for a new loan. Existing and HECM loans insured by FHA are not impacted by the pricing change.
FHA will continue to play an important role in the nation’s mortgage market in 2011. President Obama’s FY 2012 budget projects the FHA will insure $218 billion in mortgage borrowing in 2012. These guarantees will support new home purchases and re-financed mortgages that significantly reduce borrower payments.
- Fha Mortgage Insurance Mip (themortgagepot.com)
- Nearly 40 Percent of Purchase Mortgages in 2010 FHA Loans, (oregonrealestateroundtable.com)
- HUD’s PowerSaver Program to Offer Financing for Energy-Saving Home Improvements, Nationalmortgageprofessional.com (oregonrealestateroundtable.com)
- Primary Mortgage Insurance Costs (themortgagepot.com)
- Conventional Wisdom: 6 Things You Need to Know About Private Monthly MI, by Cecilia Farley MGIC (oregonrealestateroundtable.com)
- Size of FHA-backed mortgages should shrink, says report (seattletimes.nwsource.com)
- Mortgage Insurance Premiums (themortgagepot.com)
Recently, the Federal Housing Administration (FHA) made a change to its premium pricing structure: lowering the upfront premium amount from 2.25% to 1% and raising its monthly premium from .50% to .85% for 30-year loans with 5% or more down and from .55% to .90% for 30-year loans with less than 5% down. This change has made some people anxious and others just don’t care. What does this change mean to today’s homebuyers? Is this a good change or not?
Well, that depends. For borrowers with lower credit scores, an FHA loan may continue to be the best option. For borrowers with higher credit scores, private mortgage insurers offer cheaper alternatives.
Even FHA commissioner David Stevens said, in an article that appeared in the National Mortgage News on September 27, 2010, “We have actually made GSE loans with private mortgage insurance a better option for some homebuyers.”
Private mortgage insurance (MI) has become a better option because private mortgage insurance companies have made changes, too. In response to the housing and economic downturn many private companies, including mortgage insurers tightened, however, as the economy began to recover most have spent the majority of 2010, opening up markets and normalizing guidelines and some have altered their pricing . The result is private MI options that are competitive with FHA, especially for borrowers of credit scores of 720 or higher.
Here are 6 things you need to know about the Monthly MI premium plan offered by private MI insurers:
- No upfront premium: While all MI companies offer premium plans that allow for an upfront premium, the most popular premium structure by far in the industry is the Monthly MI plan where no upfront payment is needed. Borrowers choosing an FHA loan must either pay an additional 1% at closing or finance the amount into their loan.
- Lower loan amount: Most FHA borrowers choose to finance that upfront premium into the loan and spread it over the life of the loan, increasing their debt. With a private MI Monthly premium, there is no upfront premium and no need to increase the loan amount.
- Greater equity: Because there was no upfront premium to finance into the loan with a private MI Monthly premium, the borrower is put in a better equity position right from the start.
- Lower or comparable monthly payment: Here is where homebuyers and real estate professionals should rely on a professional loan originator, because several variables will come into play, especially the borrowers’ credit scores.
For instance, at MGIC, the leading private mortgage insurance company, a borrower with a 720 credit score and 5% downpayment will pay a monthly premium rate of .67%, compared to FHA’s premium rate of .85% for a borrower with the same score and downpayment. But remember that FHA also charges a 1% upfront premium! So it’s important to “do the math” to see which option is actually better for the borrower. In many cases, going the private MI route results in a lower monthly payment, compared to FHA.
- Lower total MI cost: Because there is no upfront premium and often a lower monthly premium, the amount paid for mortgage insurance can be dramatically less with private MI compared to FHA. For example, on a $150,000 loan where the borrower put 5% down and had a credit score above 720, the borrower will pay more than $2,500 more in MI costs over 3 years with FHA compared to MGIC’s Monthly MI.
- Cancellation: Fannie Mae and Freddie Mac have more flexible rules for cancellation than FHA, meaning a homebuyer using private MI may be able to cancel the monthly MI payment sooner than with FHA, saving even more money over the life of the loan.
It’s obvious that checking out all the options can really pay off for savvy lenders and homebuyers. To find out which is the better option, all the MI companies provide calculators that allow originators to compare FHA and private MI premium plans. (MGIC’s calculator is located at: www.mgic.com/calculator)
Cecilia Farley – MGIC
Cell (503) 869-5732
MGIC (www.mgic.com), the principal subsidiary of MGIC Investment Corporation, is the founder and leader of the private mortgage insurance industry, serving more than 3,300 lenders with locations across the country and Puerto Rico.
- Mortgages: F.H.A. Rule Changes for Mortgage Borrowers (nytimes.com)
- Readers’ questions on whether to prepay mortgage (sfgate.com)
- Mortgage Insurance Premiums (themortgagepot.com)
- Renovation Financing: Homepath Renovation Vs. FHA 203K Streamline! (zillow.com)
- FHA Loans In Arizona: What Fees Come With an FHA Loan? (azmortgageguru.com)
- Getting A Government-backed FHA Loan: The Steps (azmortgageguru.com)
- FHA 2010 Mortgage Guidelines (brighthub.com)
(originally posted on October 2nd, 2010)
I have had this rolling around in my head for a few weeks now, and with the change in FHA mortgage insurance monthly premiums bearing down on us in a few days, I had to share my thoughts. We’ve been doing a lot of FHA loans in Oregon & Washington, as I’m sure is the case all around the country, and this change is going to affect a lot of people. (I apologize for the low quality of the video, I have successfully screwed my phone’s camera up!)
Again, everything that’s changing about the mortgage industry is done under the auspices of avoiding another meltdown, curbing foreclosures, and making the mortgage-backed security a good investment. So, if you have an insurance policy which is designed to avert the risk of a loan in default to the lender, why would you want the premium on that insurance policy to be collected over time?
From a simple risk-assessment perspective, it would seem that the more time you are exposed to loss, the greater the likelihood that it will happen. The fear is that homeowners will default on their loan payments, so why would you push more of the premium to the monthly payment side (rather than the upfront funding fee) if the reason for the policy is to protect the investor from people who default on those payments?
It seems like the reasonable position would be to get the premium covered from day one. This reminds me of when the downpayment requirement for FHA went from 3% all the way up to a whopping 3.5 per cent. Does that extra .5% really invest the homeowner so much more that it reduces their likelihood of default? I’m not saying their should be less “skin in the game”, but if that’s going to be your approach, why not really DO IT? Make the downpayment 5%, or make some portion of the upfront mortgage insurance on an FHA home loan payable from the borrower’s own funds?
It may just be that I am making the age-old mistake of applying logic to government policy, but I am thinking that the intended purpose isn’t really what we are being told.
You can read some related posts on FHA loans and mortgage insurance:
If you have any questions about FHA financing, mortgage insurance, or home loans in general, feel free to send us an email or comment on this post! And if you have any thoughts on why the monthly mortgage insurance premiums for FHA mortgages are increasing while the upfront funding fee is decreasing, we’d love to hear them!
- It’s official – FHA has formally announced the mortgage insurance changes for FHA loans (annarborundressed.com)
- FHA Mortgage Insurance Premium Changes Made Official (fhaloanadvice.com)
- FHA To Increase Mortgage Insurance Premiums Nearly 64% – Prospective Buyers Tip (chicagonow.com)
- FHA Raising Annual Mortgage Insurance Premiums (fhaloanadvice.com)
- FHA Mortgage Insurance fees changing Oct 4th (seattlecondosandlofts.com)
- FHA 2010 Mortgage Guidelines (brighthub.com)
- FHA Feature: FHA is Changing…What is the Upside? (pinkbananaworld.com)
- Mortgage Definition: FHA 2/1 Buydown (zillow.com)