Although everybody hates mortgage insurance (MI or PMI as it is known) we’ve once again become dependent upon it. Those who have recently purchased homes know that the 2nds used in “80-10s” and “80-20s” to avoid mortgage insurance are gone.

But have the MI companies ignored the risks in their excitement about being invited to the dance? Let’s hope not. Here’s an interesting article to check out:

Strains Evident on Mortgage Industry’s Line of Defense Claims skyrocket at MGIC; losses expected for ‘08 American BankerAmerican Banker / By Harry Terris
October 18, 2007

In a sign of just how severe residential credit losses are getting, MGIC Investment Corp., the largest mortgage insurer, posted a third-quarter loss of $372 million Wednesday, projected a staggering increase in claim payments, and said it expects to continue to lose money through next year. Citing an unexpectedly rapid deterioration of conditions in California and Florida and continued weakness in the Midwest, the Milwaukee company said it expects home prices across the country to drop 10% over the next 18 months. Read the rest of this entry »

Sub-prime mortgages have largely evaporated. What remains are a few offerings in the 10–11% range with nasty prepayment penalties and the potential for future rate resets.

So what do you do if you or your client have sub-prime credit?

Try Fannie Mae’s DU engine. Although most lenders think of Fannie/Freddie as prime credit only, both offer approvals for lower credit grades. Even with a credit score in the high 500’s, you may be able to secure a Expanded Level I, II, or III approval. While these do carry higher rates—7.5% to 8.5%— you can at least secure a safe, standard 30 year fixed rate loan that doesn’t have a prepayment penalty or nasty reset two years down the road. And, 100% financing is available!

And here’s an added bonus. Fannie Mae offers a Timely Rewards Payment Option. If a borrower demonstrates a “Good Payment History”, the lender will lower the rate with fees or refinancing. The following is taken directly from the Timely Payment Rewards Disclosure and Note Addendum:

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Daily Real Estate News  /  October 11, 2007

Mortgage Woes: Be Patient With Closing Dates

Lenders are taking more time to get mortgage documents in order these days, and real estate professionals consequently must be prepared for a slower settlement process than they are accustomed to…

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The California State Teacher’s Retirement System (CalSTRS) created a home loan program for teachers back in 1984. I used to do a lot of them until the market went crazy and prices drove everyone into stated income loans. However prices are retreating to more affordable levels again, and CalSTRS restructured its program in 2004 to be significantly more helpful

CalSTRS offers a trio of programs. The Standard Conventional and the Zero Down 95/5 programs are solid performers, but the stand-out in the group is the “80/17” loan. Here’s why:

The 80/17

The 80/17 provides a combo 1st and 2nd that totals 97% of the purchase price. The 1st is 80%, eliminating PMI entirely. The 17% 2nd loan carries the same rate as the first. Both are set by STRS and as of this date are 6.625%. But here’s the cool part—payments are deferred for 5 years on the 2nd! Simple interest accrues—no compounding—and the borrower begins making amortized payments in the sixth year…

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Mortgage insurance, or PMI, has had an unfair rap ever since the media grabbed the topic 10 years ago and beat the life out of it.  Every client thereafter spit out the same warning when we met. 

I don’t want PMI!

Ok, I get it.  So, most of us started doing the 1st/2nd combo loans that eventually became so popular.  Structure an 80% 1st , put a 2nd behind it for the rest….and presto, no MI!  And we’d still be doing them now except that those high CLTV 2nds are mostly gone. 

There are times however when PMI, or MI as we now call it these days, makes more sense.  And years ago, Congress required lenders to remove MI after 20% equity could be proven with an appraisal.  Values were rising so quickly then that MI could typically be shed after a couple of years.

Last year tax deductible mortgage insurance was legislated by Congress for those with Adjusted Gross Incomes under $100k per year, removing even more of the disincentives.  Still, the stigma lingered…

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