Mortgage insurers toughen standards
Posted on Sunday, July 20, 2008
Mortgage insurers have been dramatically tightening their standards throughout the nation, further squeezing potential home buyers.
Stung by growing defaults, lenders are offering borrowers fewer ways to avoid purchasing private mortgage insurance. Mortgage insurance, required for buyers who are unable to make a full down payment or who have insufficient credit histories, reimburses lenders in the event of a borrower default. But over the past few months, mortgage insurers have been declaring more and more of the U. S. a “declining market,” raising the requirements and making such insurance harder to obtain. The result: another hurdle for home buyers and yet another wrenching change for the struggling housing market.
While it’s difficult to gauge the severity of the impact, industry executives concede insurers’ tighter standards are affecting the market. At ShoreBank Corp., a community-development bank with branches in Chicago, Cleveland and other cities, the insurers’ tighter standards are “wreaking havoc,” said Michelle Collins, director of mortgage lending. For a popular conventional loan package, “easily 70 percent of the previous set of borrowers will not be able to buy,” she adds.
The spreading restrictions are a symptom not only of the housing and credit crisis but also of the mortgage-insurance industry’s own huge losses. The insurers face massive borrower defaults on loans that were approved when securing a mortgage was far easier.
Punished with continual downgrades by credit-rating agencies, mortgage insurers have been trying to shore up their stricken balance sheets. One large player, Triad Guaranty Inc., said last month that it would stop writing new insurance and gradually wind down its business. Radian Group Inc. announced management changes last week aimed at restoring investor confidence.
Insurers add that they are pursuing the kind of more disciplined behavior that may have helped avert the housing crisis.
“Clearly, the pendulum had swung a little too far in terms of flexibility in underwriting,” said Len Sweeney, chief risk officer for AIG United Guaranty, the mortgage-insurance unit of American International Group Inc. “Some of the movement we’ve made of late is back to a more prudent approach.”
Michael Zimmerman, a spokesman for industry leader MGIC Investment Corp., said, “So far, we’re only losing the business that we no longer want to write. The long-term objective of anybody in the housing industry should not be just affordability but sustainability. I think for the last few years, the drive and the focus have been solely on affordability.”
For a time, it seemed mortgage insurers were going the way of the dinosaur. During the housing boom, when lending standards loosened drastically, borrowers often avoided mortgage insurance by taking out two loans, one that covered 80 percent of the purchase price and a second, “piggyback” loan to cover the once-traditional down payment.
But with piggyback loans all but vanished, prospective home buyers are facing more pressure to purchase mortgage insurance. The so-called penetration rate, which compares the balance of all loans covered by mortgage insurance with the balance of all mortgage loans underwritten during the same period, jumped from about 8. 5 percent in early 2006 to about 20 percent in the fourth quarter of 2007, according to several insurers’ filings with the Securities and Exchange Commission. (The rate dropped to 13 percent in the first quarter as insurers increasingly focused on more creditworthy borrowers. )
This year, mortgage insurers have benefited from the growing number of loans being funded by Fannie Mae (the Federal National Mortgage Association ) and Freddie Mac (the Federal Home Loan Mortgage Corp. ), the government-sponsored, stockholder-owned mortgage companies that require mortgage insurance on loans that don’t have a substantial down payment.
But the crisis of confidence facing Fannie Mae and Freddie Mac raises major concerns about the pipeline of business flowing to mortgage insurers.
“The U. S. housing market and the industry are very closely linked” with Fannie Mae and Freddie Mac, said AIG’s Sweeney. “The plan announced by the U. S. Treasury and the Federal Reserve should go a long way to reassure the credit markets and allow [Fannie Mae and Freddie Mac ] to maintain their critical role in the nation’s economy.”
If the insurers can’t keep up with the pace of failing loans they’ve promised to make whole, that would turn up the pressure on mortgage lenders, who could get stuck without insurance payments to offset their losses.
“There were obviously a lot of products in the market that weren’t supportive of sustainable homeownership,” said Joanne Berkowitz, executive vice president of risk management and operations for mortgage insurer PMI Group Inc. The insurers say they will be able to pay the claims.
To diminish their exposure, mortgage insurers have been defining an increasing number of markets as declining, based on housing starts, home sales and prices, unemployment and other factors. In areas where home prices are dropping, insurers bear greater risks, because a home now is more likely to bring too little at a foreclosure sale to pay off the loan.
Nowadays, insurers are frequently requiring at least a 10 percent down payment, compared with previous standards that might have included a 3 percent to 5 percent down payment.
Prices also are rising. Next month, for example, MGIC plans to charge an annualized premium of up to 0. 75 percent of the loan balance for fixedrate, 30-year mortgages with a 10 percent down payment, up from 0. 67 percent this month. The company doesn’t plan to change course anytime soon.
“Housing cycles don’t correct quickly,” said MGIC’s Zimmerman.
Some mortgage brokers are turning instead to the Federal Housing Administration, whose more-lenient loan program requires only a 3 percent down payment. The government agency’s share of the mortgage market has grown to about 10 percent to 12 percent recently, compared with about 3 percent when private-sector loans were easiest to obtain.
Yamila Ayad, president of Mission Home Loans in San Marcos, Calif., said business is growing for FHA loans on properties below $ 350, 000. But some prospective buyers need bigger loans than the FHA offers or fail to qualify.
“It’s either an FHA loan or a conventional buyer with 20 percent down,” Ayad said. “There’s no in-between.”
Meanwhile, government officials are growing concerned about the FHA taking on many loans that the private sector would refuse. On July 1, the FHA began charging higher premiums for riskier borrowers for the first time in its 74-year history.
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