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.
Another incentive is that PMI premiums are tax deductible for mortgages closed in 2007. Couples who earn less than $109,000 a year and can deduct all or part of their payments _ a one-year tax break the industry hopes to make permanent.
“That has been an attraction in some cases,” Katkov said.
Katkov said PMI is especially helpful for couples buying their first homes or those who don’t have a lot of money for a down payment but he cautioned that the rate on the insurance increases with risk. That is, the fee for the insurance is higher if the buyer makes a very small down payment or has a poor credit score.
He estimated that a couple buying a $100,000 home with a $5,000 down payment would pay about $62 a month for PMI. On average, he said, most couples build sufficient equity in their homes to cancel the insurance after four to five years.
On the Net:
First National Bank of Arizona: www.fnbaonline.com
Mortgage Insurance Companies of America: www.privatemi.com
PMI Group: www.pmigroup.com
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