Saturday, February 16, 2008

Mortgage Insurer Tightens Up

(WP) First it was the lenders. Now it's the mortgage insurers. Entire product lines are being yanked, potentially squeezing large numbers of home buyers and refinancers out of the marketplace.

On Feb. 6, the oldest and largest private insurer of home loans -- MGIC -- issued a bombshell warning that in much of the country, it would no longer provide coverage on cash-out refinancings; reduced-documentation loans; mortgages with down payments less than 5 percent; loans for rental houses and other non-owner-occupied investor properties; and mortgages with negative amortization features, such as payment-option loans.

The bans, which take effect March 3, cover a number of markets, including the District and its suburbs. Four whole states are on the list -- Arizona, California, Florida and Nevada -- and about two dozen metropolitan areas. Among them, in addition to the Washington area: Atlanta; Baltimore; Boston; Chicago; Denver; Detroit; Minneapolis; the Long Island and New Jersey suburbs of New York; Portland, Ore.; and Tacoma, Wash.

MGIC also tightened eligibility standards nationwide on a number of low-down-payment loan categories:

  • Home buyers who seek mortgages with less than 5 percent down must have minimum FICO credit scores of 680, up from the previous 620.
  • Cash-out refinancings on all non-owner-occupied rental or investment properties no longer will be eligible for insurance, no matter how high the borrower's credit scores.
  • Borrowers who seek to use reduced documentation plans must now make minimum down payments of 10 percent, have FICO scores of 660 or higher and be able to demonstrate that at least 50 percent of their annual income is from self-employment. The income restriction is intended to discourage "stated income" applications from people who could readily furnish pay stubs or W-2 tax forms but choose not to do so.
  • All buyers of condominiums in declining markets will need to come up with 10 percent down payments. Buyers of single-family homes in those areas with less than 10 percent down payments will need FICOs of 680 or higher.

    Milwaukee-based MGIC is a giant in the industry with nearly $200 billion in insurance coverage in force on 1.3 million mortgages. The company this week reported that it lost almost $1.5 billion in the last three months of 2007, and that it is exploring ways to raise more capital.

    Like other private mortgage underwriters, MGIC provides lenders protection against losses on low-down-payment loans -- those with less than 20 percent borrower equity. Competitors are expected to adopt their own versions of at least some of MGIC's cutbacks in coming weeks.

    Private mortgage insurers played a key role during the housing boom of 2001-05 by helping millions of people with modest incomes and marginal credit to purchase homes with minimal down payments. But now the industry is facing rising claims on loans that went sour.

    MGIC's retrenchment parallels recent moves by other mortgage market players, from investors Fannie Mae and Freddie Mac to regional banks. Most of them are restricting the hyper-creative financing that powered the boom -- zero-down, no-documentation, minimum-payment plans and speculator loans -- especially in markets where appreciation rates and prices spiraled off the charts. Essentially, the industry is saying: We were willing to go with the flow when all the arrows were pointing up during the boom years, but that party is over.

    What are the cutbacks likely to mean in practical terms? They could be felt almost immediately by buyers who can't come up with substantial down payments. They will need higher FICO scores. They may also find certain types of loans -- for vacation condos and small-scale rental investment properties, to cite just two -- unavailable.

    The major bright spot still left for purchasers seeking a home with low down payments: the Federal Housing Administration. The FHA's insurance program has no connection with private insurance. Borrowers can still put 3 percent down and qualify for a fixed-rate, 30-year FHA loan that comes with consumer-friendly credit, debt-ratio and other underwriting terms.

    The new federal economic stimulus package raises the maximum mortgage amounts for the FHA -- great news for high-cost areas including California, the Northeast, Florida and the Mid-Atlantic states. Pending congressional legislation would even sweeten the deal by reducing minimum down payments well below 3 percent.

    On the flip side, the FHA is a little old-fashioned in some respects. Be prepared to document your income, assets and debts. And don't even think about payment-option plans, interest-only, negative amortization and other funny-money techniques that were all the rage a few years ago.

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