In the last couple of weeks, both Fannie Mae and Freddie Mac have lifted the 5% reduction in LTV required for loans in “declining markets”. For those unfamiliar with this policy, here’s what transpired in the past few months.

For markets designated as “declining”, “stressed”, or in some cases “severely distressed”, the agencies began requiring a 5% reduction in the maximum loan-to-value allowed. Thus the 100% conforming programs like My Community Mortgage and Home Possible had become de facto 95% loans.

At that point, borrowers had to come up with 5% in down payment and qualify under the 100% program rules (think income restrictions and higher interest rates) in order to get a loan. In turn, ordinary 95% conforming loan limits were reduced to 90%, and so on. This was the change that drove everyone back to FHA financing, where a borrower can still finance up to 97% of the price and use a non-profit gift from Nehemiah to cover the down payment.

So Why The Change of Heart?

That’s a question for which I’ve not found a good answer. The real estate market crisis certainly isn’t over–especially here in California, where the number of foreclosures hitting the market is at peak flow. Furthermore, Fannie Mae and Freddie Mac are still losing money on bad loans within their portfolios and have only escaped reform by the distraction of the current crisis and the upcoming elections. So what would cause them to take on additional risk at this point in the cycle?

In the absence of a better explanation, the cynical side of me says politics is at the root. Because at the same time that the Agencies are relaxing their rules, the mortgage insurance companies who insure these loans are in full retreat. At this moment, almost none will insure 95% loans anymore. So, Fannie & Freddie can play good dad and let you go to the all-nighter, knowing mom will never allow it.

So, if you are confused by the news, just remember it’s the mortgage insurance companies who really hold the key.

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 »

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…

Read the rest of this entry »

The PMI Mortgage Insurance Company has published its Summer 2007 Economic Real Estate Trends. For Sacramento area home owners, the news is not good.

While PMI’s previous model was tuned for the rapid appreciation of the first half of the decade, the revised model gives more weight to current price trends, area volatility, and the increased use of unfriendly variable interest rate products. While the inputs have been updated, the output is the same:

“…a risk index that predicts the likelihood that home prices in a given metropolitan statistical area will be lower in two years.”

How does Sacramento stack up? How about 9^th among the top 50 MSA’s in the nation, and a 56% probability of lower prices in 2009.

Read the rest of this entry »

We’re all aware by now of the recent legislation making mortgage insurance (MI or PMI) tax deductible in 2007. As review, here are the current limitations:

• Applies only to mortgages closed in 2007
• Annual household income cannot exceed $100,000
• Temporary, must be extended to remain in effect for 2008 and beyond
• Must itemize deductions to qualify

But how much is this really going to “help Americans overcome barriers to home ownership” and are we truly “addressing the key issue of housing affordability?” After reading a lot of the early blog posts and announcements, I thought I’d look for some clarity beyond the hype.

Read the rest of this entry »