The low-down payment mortgage landscape is changing.
The Federal Housing Administration, which insures lenders for losses incurred should a borrower not make his payments as promised, is pulling in its horns in an effort to remain solvent in the face of a rising number of delinquencies and foreclosures.
At the same time, though, some of the half a dozen private companies that provide lenders with similar protection against defaults are quietly reentering the market, a market they all but vacated when the housing sector tanked.
“Private mortgage insurers are coming back,” says Mark Goldhaber, senior vice president for affordable housing at Genworth Mortgage Insurance in Raleigh, N.C.
Created in 1934, the FHA was intended to open homeownership to those with low and moderate incomes. It has a countercyclical role, too, and often expands its market share when housing hits the doldrums. But last year, the agency insured nearly 30% of all single-family loans, a portion even government officials believe is way too large. A 10% share is considered optimal.
“We have stretched to the limit to help stabilize the housing market,” FHA Commissioner David Stevens said in a recent speech in Orlando, Fla. “But we need to stay ahead of any potential problems.”
To better manage risk, increase capital reserves and ensure the long-term viability of the FHA insurance program, the agency has taken several steps that will, as Stevens bluntly put it, require “more skin in the game from borrowers.”
Beginning this month, down payment requirements on FHA-insured loans have been increased. Although borrowers with credit scores of 580 or above will still be able to make the traditional 3.5% down payment, those with lower scores will need 10% down.
In addition, the upfront mortgage insurance premium has been raised from 1.75% to 2.25%. The premium can be financed as part of the mortgage. But the change nevertheless adds $1,000 to what otherwise would be a $200,000 loan.
At the same time, the FHA has asked Congress for authority to increase the maximum monthly insurance fee from the current 0.5% level. The agency is seeking permission to hike the monthly charge to 1.55%, but has said it needs to raise it to only 0.9% at this time.
Finally, the agency is reducing permissible seller concessions from 6% of the loan amount to 3%. This change conforms to industry standards, and means that even if a seller were to agree to, say, pay all of the borrower’s closing costs, the borrower could count only that portion equal to up to 3% of the loan amount as if it were his own money.
These modifications in the FHA’s rules will result in fewer borrowers qualifying for government-insured mortgages. But while Uncle Sam is pulling back, private mortgage insurers have made some subtle changes that signify their belief that the housing market has reached some semblance of stability.
Without fanfare, for example, Genworth has rewritten its underwriting guidelines so that it will now back 5% down payment loans to borrowers anywhere in the country. Previously, such mortgages were not available to borrowers in so-called “declining markets,” which in Genworth’s case were California, Arizona, Nevada, Michigan and Florida.
Madison, Wis.-based MGIC, the nation’s largest private mortgage insurer, also has tweaked its guidelines. The changes aren’t broad, company representative Katie Monfre says, but they are meaningful. Among other things, it has removed some markets from its restricted list and reduced the minimum FICO score required for a loan with a 5% down payment to 660.
Radian Guaranty in Philadelphia went away from the declining-markets concept altogether “at least a year ago,” says President Teresa Bryce. Instead, it now backs 95% loans anywhere as long as trusted lenders with low delinquency rates underwrite them.
To the average borrower, there isn’t a whole lot of difference between a government-insured FHA loan and one that’s backed by a private company. Premiums for each are tax deductible, and the coverage can be canceled when the borrower’s equity reaches 20% of the original loan amount.
For most lenders, 20% is the magic cutoff point at which they no longer demand insurance. You can build up equity both by paying off principal and by appreciation in the property’s value.
However, while FHA loans are generally considered to be the less expensive alternative, that’s not always the case. Savvy borrowers would be wise to consider both before jumping to a decision.
Private mortgage insurers have implemented their own price increases, but that was two years ago. And their premium structures are quite competitive with the government’s.
Generally, PMI pricing is more affordable for borrowers making a down payment of 10% or more. And the private firms now can pretty much match the FHA on loans with just 5% down. “We can be competitive,” says Radian’s Bryce.
Yes, the FHA requires as little as 3.5% down, but you now need a FICO score of 580 or better to qualify. But private insurers will go as low as 3% on so-called affordable housing loans offered through state housing finance agencies.
Here’s how the two line up on a $200,000 mortgage at 5.5% with three down-payment scenarios based on Genworth’s pricing model:
At 5% down, the principal and interest on an FHA-insured loan of $190,000 would be $1,103 a month. Add in the $79 monthly charge for insurance, and the payout would be $1,182. Rolled into the loan amount as paid as part of your monthly payment, private insurance is $46 more.
But with 10% down, the numbers favor PMI: $1,120 a month for an FHA loan, $1,115 for private insurance paid monthly and $1,043 a month when the coverage is paid at closing.
At 15% down, the FHA payment is $1,474 versus $1,436 for private coverage paid monthly and $1,394 if paid all at once.
Private mortgage insurers bring other benefits to the table, too. Through Genworth, for example, Flagstar Bank in Troy, Mich., is offering job loss protection at no extra cost to borrowers who were laid off involuntarily. The insurance will cover the borrower’s house payment, including taxes and insurance, for up to $2,000 a month for six months.
And Radian will advance up to $15,000 to lenders to be applied to troubled borrowers’ accounts to facilitate a mortgage-retention workout plan and ultimately reinstate the loan. Better yet, the money does not have to be paid back.
“Nobody expected the PMIs to step up to the plate, but we have an alignment of interest with homeowners,” Bryce says. “We want them to remain in their homes as much as they do.”
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