PMI Mortgage Lending Practices...
Private mortgage insurance
information and a
short PMI history lesson. With
the financial
success of the FHA's
Section 203(b) loan
insurance program
was not lost on
private
industry.
In the late 50's, the Mortgage
Guaranty Insurance
Corporation (MGIC)
was formed as a
privately owned
business venture to
compete with the FHA
in insuring home
mortgage loans. In
the late 60s
several things happened that
allowed MGIC to
enjoy a sudden burst
of growth. The first
was a red-tape snarl
at the FHA that
resulted in loan
insurance
applications taking
4 to 8 weeks to
process, much too
long a wait for
sellers, buyers,
brokers, and lenders
who were anxious to
close. In contrast,
MGIC offered 3-day
service. Then, too,
FHA terms were not
keeping up with the
times; moderately
priced homes
required larger down
payments with FHA
insurance than with
private insurance,
and the FHA-imposed
interest rate
ceiling hindered
rather than helped
many borrowers.
Also, private
mortgage insurance
(PMI) was priced at
less than the FHA
was charging. Then
in 1971 the Federal
Home Loan Bank
Board, overseer of
savings and loan
institutions,
approved the use of
private mortgage
insurers. By 1972
private insurers in
the United States
were regularly
insuring more new
mortgages than the
FHA.
PMI Coverage
Success spawns
competition, and by
1983, 13 private
mortgage insurance
companies were
insuring loans.
MGIC, however, is
still the dominant
force in the
industry. Like FHA
insurance, the
object of PMI is to
insure lenders
against losses due
to nonrepayment of
low down-payment
mortgage loans. But
unlike the FHA, PMI
insures only the top
20% to 25% of a
loan, not the whole
loan. This allows a
lender to make 90%
to 95% LTV loans
with about the same
exposure to
foreclosure losses
as a 72% LTV loan.
The borrower,
meanwhile, can
purchase a home with
a cash down payment
of either 10% or %5.
Under the 10% down
payment program, the
borrower pays a
mortgage insurance
fee 1/2 of 1% the
first year and 1/4
of 1% thereafter.
The 5%-down program
costs the borrower
3/4 of 1% the first
year and 1/4 of 1%
annually thereafter.
When the loan is
partially repaid
(for example, to a
70% LTV), the
premiums and
coverage can be
terminated at the
lender's option. PMI
is also available on
apartment buildings,
offices, stores,
warehouses, and
leaseholds but at
higher rates than on
homes.
Private mortgage
insurers work to
keep their losses to
a minimum by first
approving the
lenders with whom
they will do
business. Particular
emphasis is placed
on the lender's
operating policy,
appraisal procedure,
and degree of
government
regulation. Once
approved, a lender
simply sends the
borrower's loan
application, credit
report, and property
appraisal to the
insurer. Based on
these documents, the
insurer either
agrees or refuses to
issue a policy.
Although the insurer
relies on the
appraisal prepared
by the lender, on a
random basis the
insurer sends its
own appraiser to
verify the quality
of the information
being submitted.
When an insured loan
goes into default,
the insurer has the
option of either
buying the property
from the lender for
the balance due or
letting the lender
foreclose and then
paying the lender's
losses up to the
amount of the
insurance. As a
rule, insurers take
the first option
because it is more
popular with the
lenders and it
leaves the lender
with immediate cash
to re-lend. The
insurer now has the
task of
foreclosing.
Private
Mortgage Insurance
To Loan Points
|
