Latest Freeze: PMI.
With the real estate market crumbling apart and credit markets grinding to a halt, I'm beginning to suspect that Private Mortgage Insurance is going to be the next sector of home finance to get a dose of their own medicine.
CnnMoney writes that PMI applications for August '08 were down 32% year over year. That is a HUGE drop, and signifies major uncertainty in the mortgage insurance sector.
For those that don't know, let’s start off with what PMI is and how it works:
PMI is given to qualified borrowers who seek more than 80% financing from the lender. Once PMI is issued, the premium for the insurance is passed on the borrower and is paid back monthly. The calculation for the premium is based on your risk profile, usually ranging from 50 to 75bps of the loan per year. For example a $500,000 loan with great credit and 90% financing would have a monthly premium of roughly $208.33 ($500,000 * .0050/12).
For years PMI was never a concern from an underwriting standpoint, however more recently it has been getting tougher and tougher to get approved; PMI companies now have two sets of guidelines, one for properties in a declining market and another for stable market properties. Of course each guideline has its respective premiums.
See here, here, and here for examples of PMI underwriting guidelines.
My most recent confrontation with PMI, and one of the reasons why I am writing this post today has to do with a couple from Brooklyn who are purchasing a 2 family home in Mill Basin (a very nice area in Brooklyn, NY), and are putting 10% down toward the mortgage. They are my clients and we have come to a point where the file is clear of any outstanding underwriting conditions, the commitment has been issued, and the only item left to obtain is PMI.
Last week I received a call from my underwriter letting me know that they cannot obtain the coverage. I freaked out and called all the mortgage insurance companies myself only to find that NOT ONE COMPANY WANTED TO PROVIDE THE INSURANCE.
I was shocked! The clients are purchasing a 2 family home at 90% financing, with a loan amount of $619,000 (Agency-Jumbo), and they cannot get financing?!? They have a 781 and 783 FICO score!!! I got through to an underwriter from one of the PMI companies and was told that due to the declining market of NYC (including Manhattan), they will not insure a home with that high of a loan amount. Minimizing the risk exposure, eh?
Having no choice, I had to place the borrowers into an FHA program. FHA will provide its own PMI but it will be extremely expensive, in this instance 1.25 points up front and 55bps/year in Mortgage Insurance. Unfortunately, my clients had no choice; it was either they take the new loan or lose their 10% down payment.
In conclusion, if you are getting PMI, please make sure your lender orders and approves the insurance BEFORE the commitment is issued! It is getting very tough out there people and my clients and I had to find out the hard way, I don’t want any of you going through the same pain.
If the commitment is issued and your lender cannot obtain PMI coverage, you hold the risk of losing your down payment. Make sure you consult with your attorney regarding the infamous mortgage contingency clause!
Posted by MortgageMan
Tue Sep 30th, 2008 12:12 PM
http://www.bloomberg.com/apps/news?pid=20601087&sid=a464lcMVn598&refer=home
Coincidence?
Posted by john
Tue Sep 30th, 2008 12:39 PM
In a situation such as that, can the buyer re-finance later and seek a lower rate for PMI?
Posted by MortgageMan
Tue Sep 30th, 2008 12:48 PM
Excellent question, John.
If the borrower's home appreciates in value or the borrower has paid off their loan, such that the loan amount is now 75% of the value of the home (This is called LTV or Loan to Value), they can refinance their mortgage and avoid the PMI.
The rate for the mortgage insurance decreases with the amount of coverage requested, so when a client refinances from a 90% mortgage to 85%, the premium charged will be lower.
Posted by k91
Tue Sep 30th, 2008 01:03 PM
Same happened to us - eerily, the numbers are very similar. Wife and I are 740+. Loans amount is just over 600K. 90% LTV. Lender loves us. Underwrite the file conditioned upon MI cert. Sent to ALL MIs and not one was prepared to insure 90LTV. Slightly differet facts in our scenario and represents a ridiculously arcane requirement is that we hold investment property with about 15-20% equity. It's leased up for year and as a result will pull in around 40 K in income. All MIs said that because the investment property has less than 30% equity in it, that they were unwilling to recognize the 40K in income that the property generates. Bye bye 40 K. Hello substantially increased debt to income ratio.
Long story short, one MI decided to insure 85% ltv, meaning we needed to find another 30K for closing, which we were able to.
Some problems I find with what happened to me.
1. There are only FIVE or so MIs?! WTF?
2. Relatedly, these FIVE MIs are mostly based NO WHERE NEAR the NYC market or have any idea of NYCs sub markets. Granted NYC is having it's troubles, but to simply BLANKET whole zip codes with a declining or not declining tag is particularly almost recklessly misleading when it comes to NYC
3. You mean to say that although my tenants are contractually bound to furnish me with 40k a year to live in my property, these MIs are going to throw out EVERY penny of such income because the prop has less than 30% equity. EVERY PENNY. I understand the equity reasoning, but not the EVERY PENNY reasoning.
In sum, my situation and the one above are yet two more examples/manifestations of the grinding halt to which this economy is coming absent some form of government grease.
Posted by MortgageMan
Tue Sep 30th, 2008 01:12 PM
K91:
So sorry that it happend to you. It is unfortunate and is just another example of expensive money and tight underwriting in our present day enviorment.
Just 2 years ago, brokers could give a mortgage to a cat. Now I won't be surprised if a urine sample will be required for my next client's mortgage application.
Don't get me wrong, I think we should have had stringent lending practices from the get-go. We wouldn't be in this mess if it wasn't for lax underwriting. Unfortunately we can't turn the clock backwards and now we all have to pay for the mistakes of others...
Posted by uwsider
Tue Sep 30th, 2008 01:39 PM
MortgageMan,
For completeness of the whole picture, could you tell us the following
- combined income of the couple (to get an idea of percentage of income is going towards loan). Not including any expected rental income
- approx current debt they had
- what kind of loan? IO ARM? etc etc
- Am i correct to assume the NEEDED to be able to rent out the second unit in the 2 family to be able to 'comfortably' (30-40% of income) afford the payments.
Posted by MortgageMan
Tue Sep 30th, 2008 01:47 PM
uwsider:
How are you? Hope all is well...
To protect the privacy of the clients, I do not want to disclose their income and debt, however I will tell you that their ratio's (Debt To Income) were great.
Put it this way, for an agency-conforming mortgage, Fannie Mae will only accept 45% or less DTI ratios. Their DTI was 34%.
This was a 30 Year Fixed Agency-Jumbo loan.
For agency loans (Fannie/Freddie) on 2 unit properties, a operating income statement is required with the appraisal to show what the reasonable rental income range is for the area of the home.
Once a rental agreement is shown, the bank will only take 50% of the monthly rental payment to use for the DTI ratios. The reason they take only 50% is because the rent has not been seasoned (2 years rental history or more) so they must underwrite using the worst case scenario. If you are refinancing and the rent has been seasoned, the bank will take the full rental income.
Posted by NYCbrokerguy
Tue Sep 30th, 2008 01:49 PM
K91:
Hate to break it to you, but NYC IS in a declining market across the board. All zip codes, all neighborhoods. The bank is doing the right thing. What happens if your tenants were to lose their job this year? You need to have substantial savings to cover costs in that scenario. The fact that you are unwilling, or most likely, unable to produce 20% down is a big red flag.
Posted by uwsider
Tue Sep 30th, 2008 01:53 PM
MortgageMan,
Great explanation, in your opinion do you think lending standards are simply returning to pre-boom boom levels (eg before 2000) or will eventually return to these standards.
If so, is there anything really wrong with that as it strengthens the market long-term
Posted by MortgageMan
Tue Sep 30th, 2008 02:18 PM
NYCbrokerguy:
I somewhat disagree with you.
Believe it or not, NYC (including the 5 boroughs) is not considered declining market by the GSE's. Essentially in K91's and my scenario, both loans should have not been flagged as declining market. HOWEVER, the MI companies have and are using different guidelines to determine whether or not an area is a declining market. Same goes for a bank that is issuing a loan that it will hold on its portfolio.
Also, putting less than 20% down does not raise a red flag. What if some people just do not want to hold a 20% stake in the property? If they have sufficient resources (assets and income) to do so, they will not have trouble getting the financing but WILL BE CHARGED A PREMIUM. This is the reason mortgage insurance companies were established. Although, as we all can see, this is coming to a screeching halt.
Posted by locked
Tue Sep 30th, 2008 02:58 PM
In the cases described above, can the buyer not obtain a "piggyback" mortgage to meet the 20% down requirement? Isn't that one way to avoid paying PMI? Does that type of second loan solution not possible any more due to the current market crisis?
Posted by MortgageMan
Tue Sep 30th, 2008 03:06 PM
Locked:
Unfortunately, due to the current market conditions, HELOC's or "piggyback" mortgages are virtually non-existent. From a risk perspective lenders do not want to offer access to equity in a depreciating asset and from a financial perspective, not a lot of banks have the resources to issue HELOC's anymore.
Read more here: http://www.urbandigs.com/2008/08/mortgages_the_raw_data.html
With PMI now getting very stringent, an FHA loan seems to be the only alternative. Get ready to pay points for your mortgages!
Posted by locked
Tue Sep 30th, 2008 03:17 PM
MortgageMan,
Thanks for the clarification. Do you think the situation would improve in 6 months? Further tightening of the mortgage market would only worsen the RE market nationwide, how are we every going to get out of this mess?
Posted by MortgageMan
Tue Sep 30th, 2008 03:30 PM
Locked:
No worries.
Honestly, I have no idea what the market is going to be like in 6 months, I don't think anyone does. Before this entire credit crisis happend, we were able to somewhat guage the market. Now we are surprised everyday by changing guidelines, extremely volatile rates, and tightening credit.
That said I think Hank Paulson's package, no pun intended, should help the easing of secondary mortgage markets. But I am a huge pessimist and tend to think in worse case scenarios... so what will happen if it doesn't get past the congress?
Here is my take... If Wall Street cannot sustain itself and gain confidence to invest in equities, and the dollar and commodoties are not as lucrative from an investment standpoint... Would I be wrong to suggest investing in Mortgage Backed Securities?
Posted by locked
Tue Sep 30th, 2008 06:00 PM
MortgageMan,
Good point. I am some what of an optimist and believe that the market will find a some way to work things out. We just have to sit tight and ride through this together. Thanks again.
Posted by Noah
Tue Sep 30th, 2008 09:30 PM
solid piece and commentary Mortgageman!
Posted by New Homes in Charlotte
Wed Oct 1st, 2008 10:03 AM
That would certainly be a huge problem if the PMI market started to fall. Hopefully with this new government bailout, it won't be as bad as it could have been. Home prices do seem to be bottoming out, since their decline is not decreasing as fast as it was a few months ago.
Posted by Maggie Knowles
Wed Oct 1st, 2008 01:33 PM
This is a bailout for foreign investors and I understand that if the bill doesn't allow that, Bush will veto it.
I resent this shifting the burden for this onto the backs of my grandchildren. If we're going to spend $700B, then spend it here in the United States of America to create jobs, educate our kids, and provide badly needed health insurance.
Let Wall St. solve their own problem. Create an investor tax fund to bail out foreign investors. There are other solutions. I am fighting very hard for a NO vote on the bill. I have called all my reps, especially the house reps because we can vote them out of office in November. I hope they listen.
Posted by naggster
Wed Oct 1st, 2008 10:32 PM
Wow this really hits home. I tried to buy a condo in Mill Basin a few months ago. Only 5% down, but good income and good credit. We had the same problem, that after months of trying, the broker still couldn't get up approved for PMI.
We tried to get out of our contract but since technically we had a mortgage committment sans PMI the seller wanted to keep the downpayment. After hiring a second lawyer to get involved, the seller released our money back to us.
I definitely agree that brokers should apply for PMI first. And given what's going on these days, not only is a mortgage contingency a necessary given, but a PMI contingency as well would be a smart move.
Posted by Mortgageman
Thu Oct 2nd, 2008 09:08 AM
Naggster:
So sorry that it had to happen to you as well, it reallÝ is unfortunate.
As I said in my post above, I would urge anybody seeking 90% financing by ways of PMI, to make sure their lender obtains mortgage insurance BEFORE they issue the commitment.
YOUR money is at stake!!
Posted by LJ
Thu Oct 2nd, 2008 11:22 AM
Arghh! My husband and I are going through this right now. One major bank has already failed to get PMI for us 1 month ago and now we are working with a credit union to see if they can get a different deal. If the credit union doesn't work out- we will have to put another 5% down in order for the MI company working with the major bank to feel "safe". Like the others, we have an excellent Debt to loan ratios, high credit scores over 750, and put 10% down. But thanks to the current market, none of that is good enough. We were offered the FHA option but we wanted to try our luck with the credit union first. The declining market thing has also been a thorn as it prevents us from qualifying for other loan options- we are buying in PLG in Brooklyn.
I really appreciate this article as it lets me see tht we are not the only ones dealing with this bull*.
Are we being selfish by wanting the bailout to work out so we can get a home wihtout having to give up our life savings to qualify for PMI???
Thanks for speaking on this.
LJ
Posted by LJ
Thu Oct 2nd, 2008 11:28 AM
I forgot to add that our loan amount is much lower than the others- around $440K- yet we are still having trouble getting PMI. Yes Yes we know- if we put more down we can qualify for a conventional loan amount- but this is not a good option for us as we want a safety net of cash available to us.
Posted by MortgageMan
Thu Oct 2nd, 2008 12:25 PM
LJ:
That is horrible. Please keep us updated on the outcome of all of this.
I have one concern with your scenario: How is the credit union going to get different coverage than the bank? There are only a handful of companies left that will provide mortgage insurance.
The only way that I can see this happening is if the credit union does not sell the loan to the agencies and keeps it on its books (which is really unlikely in this market).
I really do not mean to be negative and hope only for the best for you, but I think you should definitely call your contact at the credit union and ask how they will seek the required mortgage insurance coverage.
Personally, I do not think that you are being selfish.
Buying a home and obtaining a mortgage is part of the American dream, and I'm sure you worked hard to finally get to your position. The ramifications of lax lending practices and bad bets on Wall Street should not be passed on, via a tax markup, to the American tax payers. HOWEVER, I think this plan will help all of us out in the long run.
Best of Luck!!!
Posted by anonymous
Thu Nov 6th, 2008 08:11 AM
If Fannie Mae and Freddie Mac were taken over by the United States government, why do we continue to pay PMI? Why do we have to pay Private Mortgage Insurance? These loan are now back by the full faith and credit of the Unityed States government. Why do we continue to throw money away of PMI donations? Private Mortage Insurance companies won't even be around in 2009. These PMI companies never factored in these massive amounts of foreclosures into their business models.
Posted by John
Fri Dec 26th, 2008 02:18 PM
Great post! I wish more people were talking about the changing PMI rates and requirements. I looked into a refi today, and it didn't make any sense because the PMI rates have more than doubled. I worked the interest rate down to 4.625 from 6.25, and incredibly I would only save a few dollars a month after the increase in PMI and closing costs rolled into the new loan. It really bothers me how these so called "financial gurus" advise people into looking into refinancing and don't even mention what's going on with the PMI rates.