There are only a few more weeks before changes in Federal Housing Administration mortgage insurance go into effect — changes that will cost millions of borrowers who need a government-insured loan to get into a home more money.
But if you hear that snickering sound, it’s because what is bad for FHA has become better for the private mortgage insurance industry — an industry that is rising out of the ashes of the mortgage firestorm of five years ago.
Come April 1, FHA will increase its annual mortgage insurance premium to most buyers by 0.10, going from 1.25 percent of what is borrowed to 1.35 percent. Over the last several years, FHA has steadily increased that premium, mainly because it has been losing money in covering the riskiest of America’s borrowers. Currently it is trying to cover a $16.3 billion budget shortfall.
Borrowers gravitate to FHA because it offers a small down payment of 3.5 percent and it doesn’t penalize borrowers who have low credit scores in the same manner that Fannie Mae and Freddie Mac do.
For instance, a borrower with a credit score of 650 would be eligible for a 3.25 percent, 30-year fixed mortgage with FHA. That same borrower on a conventional mortgage would get a rate about 1 percent higher at 4.25 percent. On a $300,000 mortgage that would mean a FHA payment of $1,328 vs. a conventional payment of $1,476, a difference of $148.
But that 650-score borrower has that score because every now and then he misses a payment on a bill. Therefore, he’s more a risk and that is what FHA has been dealing with.
Now let’s take a similar borrower, one who does not have credit issues but still needs a low down payment, and see how much his monthly mortgage insurance under FHA will now cost beginning April 1. The monthly mortgage insurance for that loan will cost $337.50.
For the borrower, who is able to put down at least 5 percent and with a loan amount of $300,000, the monthly private mortgage insurance premium is roughly $167 a month.
So if a borrower, with good credit, can find that extra 1.5 percent of down payment, the mortgage insurance obligation from a private mortgage insurance company is going to be much less in the long run than the borrower who is considering FHA.
I hear that snickering again.
In addition to that change, FHA will also no longer release its mortgage insurance once a borrower has paid down the mortgage to 78 percent of its value. The reason behind this is that FHA will still fully insure the loan to the lending bank beyond that loan to value. So if a borrower has 30 percent equity in the home, but allows the mortgage to go into foreclosure, FHA will still cover the lender’s losses even though it is not collecting any premium.
That is different for private mortgage insurance companies, in that once a borrower hits 80 percent loan to value and the mortgage insurance falls off, the PMI company is off the hook with the lender.
Because of these changes of all mortgage insurance policies written, the private MI companies have seen their market share grow from 21 percent in the first quarter of 2012 to 35 percent in the fourth quarter, according to Inside Mortgage Finance, an industry publication.
Private guarantors wrote new policies on $175 billion in mortgages in 2012, more than double the year before, according to data from Inside Mortgage Finance. The industry currently insures about $900 billion in loans, while FHA’s portfolio is $1.1 trillion.
The resurgence of these companies hasn’t been lost on investors. Two companies recently report that they had raised significant money. MGIC Investment Corp. has raised about $1.1 billion selling stock and notes and Radian raised $689 million earlier this month.
So, as the Department of Housing and Urban Development is deliberately trying to shrink FHA’s exposure and recoup its losses, private mortgage insurance companies are coming back in a big way and borrowers should take note.
Robert Nusgart is a loan officer with Mortgage Master Inc. in Baltimore. He can be reached at 443-632-0858 or by email at [email protected]. His NMLS number is 204797. Visit his website at www.RobertNusgart.com for the latest mortgage and financial news.