Dennis' Mortgage Blog

Question of the week:  What is happening with mortgage insurance?

Answer:  Mortgage insurance has become a major factor in the mortgage and real estate industries the past few years, particularly with the disappearance of the “piggy-back” second trust deeds that allowed mortgage borrowers with less than 20% equity in the property avoid mortgage insurance.

There are two types of mortgage insurance in the market, private mortgage insurance, referred to as PMI or MI, and FHA mortgage insurance, called MMI or FHA.  FHA mortgage insurance won’t be part of this discussion as it is mandatory on all FHA mortgages and the underwriters for FHA mortgages underwrite to the same guidelines since all FHA mortgages are insured uner the same guidelines. 

Private mortgage insurance is a different matter.  PMI companies all have their own guidelines and policies.  Lenders defer to MI underwriters on many guidelines, and for loans that require MI most lenders have what are known as “delegated” underwriters on staff—underwriters who are delegated by one or more MI companies to underwrite loans to the MI guidelines.  The guidelines for MI companies are typically stricter than those of the lender.  Because of this a borrower who may receive an “Approve-Eligible” decision from the Fannie Mae Desktop Underwriter that a lender would use for a loan approval may find his loan declined by a mortgage insurance company for income to debt ratios, funds to close issues or, most likely, issues with the appraisal, property or value.

The primary issue that we have had in getting MI approvals the past few years has been the collateral issue, the issue of the subject property’s condition, value according to the MI underwriter or acceptability.  This is for two major reasons. 

Reason one, MI companies are what are known as collateral lenders.  If you have mortgage insurance and default on your mortgage the MI company only pays if the lender takes a loss that reaches into the MI company’s coverage (typically 25% of the loan on a 90% loan to value mortgage).  This means the MI company puts its risk primarily on the value of the property and its ability to hold value in relation to its coverage. 

Reason two is the stability of the housing market and its values. A few years ago most of California was not eligible for private mortgage insurance due to most, if not all, of the state being labeled a “declining market area.”  MI companies were unwilling to cover losses on properties that were declining in value, their 25% coverage would quickly become 30%, 40% or possible 50% coverage.  As parts of the state have recovered in relation to housing values some areas have had the tag of “declining market” lifted and MI companies began to underwrite loans for coverage.  Underwriting and approving however are two separate things and while theoretically MI has been available for many borrowers in the state, realistically MI approvals have been extreme difficult to come by in many instances; almost always because of the evaluation of the collateral, i.e. the property.

The market primarily affected by the severe tightening of the MI markets has been the condo market.  Generally a market with low down payment borrowers, the tremendous pull back in condo financing earlier this year by FHA combined with the tightened criteria for MI approvals have hit the condo market very hard.  The double whammy has caused price depreciation in non-FHA complexes and in some instances created environments ripe for investors with cash to purchase distressed condo properties, which further exacerbates the difficulties of getting financing in the complex due to upside owner occupancy ratios. 

Because of the extreme challenges we have been facing in getting MI approvals for borrowers we, along with most of the industry in California and other parts of the country, have been strongly suggesting to borrowers that instead of a conventional mortgage with 10% and getting MI that instead we use FHA financing for their new home loan.  The primary reason for going FHA being the ease of underwriting for FHA compared to MI.  One argument for using MI rather than FHA is the ability to remove the MI after the principal has been paid down sufficiently.  However if you don’t get approved for the loan you don’t have any MI to worry about removing in the future.

Reports from MI companies are showing California as stabilizing in value, overall the state is showing growth of 1-6% depending on the region from last year.  With this stabilization should come some relaxing of underwriting standards in regards to review of appraisals and property, thereby making MI more attractive than FHA.

In a meeting earlier this week with a senior executive with a national lender we spent some time discussing MI and the issues we have had.  He indicated that with the values stabilizing and increasing rather than decreasing in most markets that he sees California becoming a prime marketing area for MI companies in the coming months.

We’ll see, in the meantime do not expect us to be on the forefront of testing the MI underwriting waters with our clients’ housing futures at stake.  We will continue to take the conservative and cautious approach with our clients, as we have since we opened---which is why we still are!

Have a question for me?  Ask me!

Wacky.  That is the word for the Mortgage Backed Securities (MBS) market this week.  There was some economic news that might lend itself to investors seeing some sunshine on the economy down the road, but at most some brightness in the shade.  Despite the tepid data investors have been reacting as if we are definitely in economic recovery mode selling off MBS and driving down prices—and rates up. 

As for the tepid data.  Retail sales in August were up 0.4% from a crummy July.  Industrial production rose 0.3% in August but at the same time July was revised down 0.4% so no gain there.  Unemployment claims dropped for the third straight week but still saw over 450,000 people file.  One piece of data that is not tepid is the University of Michigan Consumer Sentiment Survey which was well below expectations at 66.6, its lowest level in over a year.

Normally none of this data would move the MBS market, or if it did the move would be to higher prices and lower rates.  Instead the opposite has occurred with rates inching higher almost daily since MBS prices peaked on August 31^st. 

Where’s the money going?  Since August 31^st the Dow Jones Industrial Average is up 600 points, with 450 of that the week of August 31^st.  This past week the Dow has bounced daily but is only up 50 points for this week.  In the meantime since August 31^st the Mortgage Backed Securities market has dropped 137 basis points and closing today at the lowest level since July 28^th.

Rates for Friday September 17, 2010:    Rates dipped on Monday and Tuesday and then remained flat through midweek before climbing late yesterday and into today to see us flat to last Friday.  A weird market with too much volatility for the economic data we are getting. 

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional                             4.125%             Flat

30 year conforming-jumbo                    4.375%             Down .125%

30 year FHA                                         4.00%               Flat

30 year FHA jumbo                              4.25%               Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. 

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment with an impound account for taxes and insurance and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

Last week of summer, sure has felt like Autumn in Southern California for some time though!  Happy 11^th Birthday to our Blaire, we’ll be spending Saturday afternoon through Sunday morning with the ubiquitous slumber party.  Well honestly Leslie probably will be, Harrison and I may be relegated upstairs to read a book and watch some sports out of the way!

Have a great week,

Dennis