Private mortgage insurance has Comeback
found at insurancenewsnet.com
3 May 2007
Source: The Associated Press AP Online All rights reserved.
Private Mortgage Insurance NEW YORK_Private mortgage insurance is
making a comeback. Until six or eight months ago, private mortgage insurance was
out of favor as people eager to get into the roaring housing market took
adjustable-rate mortgages or "piggyback" loans or some other exotic
form of financing.
But as the market has cooled and lenders have tightened their standards, many
people who want homes _ especially first-time home buyers and those with little
money for down payments _ are choosing traditional fixed-rate mortgages backed
by private mortgage insurance, or PMI.
The insurance costs the borrower a monthly fee, typically a set percentage of
the total mortgage loan. If for some reason the borrower can't repay the loan,
the insurance kicks in and the lender gets some of its money back. Because of
the guarantee, lenders are more willing to write the mortgages.
It helped Manuel Santa Cruz, who closed on a home last month in Tucson, Ariz.
Santa Cruz, a consultant for a biotech company, said he and his wife Michelle
were happy to sign up for PMI, which will cost them $150 a month, because it
allowed them to get the kind of mortgage they wanted.
"We didn't have a lot of money for a down payment, but we had enough income
to handle the monthly payments," Santa Cruz said. "And we felt
strongly that a fixed rate would be easiest for us to handle."
Santa Cruz also noted that the couple can cancel the insurance once they build
up more than 20 percent equity in the house, which has four bedrooms, two baths
and a big yard for their 3-year-old son Augustine.
Pat Lamb, president of the mortgage division of First National Bank of Arizona
in Scottsdale, which wrote the mortgage for the Santa Cruzes, said that until
about six months ago, most home buyers who didn't have the money for a 20
percent down payment were opting for piggyback loans.
These loans actually involve two mortgages. In an 80-10-10 configuration, the
home buyers puts 10 percent of the home's value down in cash, gets a primary
mortgage for 80 percent and then takes a second mortgage for 10 percent. The
advantage of this approach is that the interest on both mortgages can be written
off at tax time; the disadvantage is that the rate on the second mortgage
generally is at least 2 percentage points higher than on the first and can rise
with market rates.
"In last six months, the mortgage insurance side has become much more
competitive," Lamb said.
This is due, in part, to lenders becoming more hesitant to make piggyback loans
because of problems selling them to investors, he said. Rising defaults in
subprime mortgages, which are aimed at people with poor credit, had made
investors shy away from second mortgages, Lamb said.
But these same investors are comforted when loans are backed with mortgage
insurance, he said.
A number of companies underwrite the mortgage insurance, including MGIC
Investment Corp. in Milwaukee; PMI Group Inc. in Walnut Creek, Calif.; and Triad
Guaranty Inc. in Winston-Salem, N.C.
Data from the mortgage insurers' trade association, the Mortgage Insurance
Companies of America in Washington, D.C., shows that even as housing sales have
dropped, the use of PMI has risen.
The group said that 118,214 borrowers used PMI to buy or refinance a home in
February, up from 104,146 a year earlier. The dollar volume of insurance written
increased to nearly $17 billion in February from $15.2 billion a year earlier.
David H. Katkov, president of PMI Mortgage Insurance Co., a division of the PMI
Group, said the swing back to the use of PMI grows not only out of weakness in
the subprime market but also a sense in the industry that "some of the
exotic mortgage types were inappropriate for many buyers" and that
conventional mortgages with PMI made more sense.
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