Category: Articles & Op-eds

Blog: Mortgage Insurance: A faster way into your first home

Posted on by dcadmin

For many Americans, the biggest hurdle in buying a home is the down payment. According to a recent report, 49% of non-homeowners stated that not having enough money for a down payment and closing costs was a major obstacle to purchasing a home. Many people also mistakenly believe lenders require a 20% down payment to qualify for mortgage financing.

Data shows that by using private mortgage insurance (MI), millions of homebuyers with down payments as low as 3% or 5% have been approved for affordable and well-underwritten mortgages.

In the past year alone, MI has helped more than 1.1 million borrowers purchase or refinance a mortgage. Nearly 60% were first-time homebuyers, and more than 40% had annual incomes below $75,000.

How MI works

In addition to the other elements of the mortgage underwriting process — such as verifying employment and determining the borrower’s ability to afford the monthly payment — lenders require borrowers to commit some of their own money before approving their mortgage loan. This is where MI entered the system more than 60 years ago, to bridge the down payment gap and help creditworthy borrowers qualify for a mortgage without large down payments.

Benefits of MI

  • It helps you buy a home sooner. On average it could take 20 years for a household earning the national median income of $61,372 to save 20%, plus closing costs, for a $262,250 home, the median sales price for a single-family home. MI helps borrowers qualify with as little as 3% down.
  • It is temporary, leading to lower monthly payments down the road. MI can be cancelled once 20% equity is established, either through payments or home price appreciation. Borrowers typically can cancel MI within the first five to seven years. This is not the case for the vast majority of mortgages insured by the Federal Housing Administration. FHA mortgage insurance premiums stay on the loan for the life of the loan.
  • It provides several flexible payment options. Your lender can offer several MI product options for MI payment; the most common is paid monthly along with your mortgage until the MI cancels.

MI is a stable, cost-effective way to obtain a low down payment mortgage, and offers distinct benefits to borrowers. It’s been a cornerstone of the U.S. housing market since 1957, providing more than 30 million families with the opportunity to own homes despite financial barriers. If you are considering purchasing a home, it is important to understand your options, including your low down payment options. To learn more, visit LowDownPaymentFacts.org.

Article: Data confirms buyers don’t need to wait decades to save up to buy a home

Posted on by dcadmin

By Brad Shuster

June is National Homeownership Month, and this year we celebrate amidst a national conversation about how best to reform the U.S. housing finance system to sustain and grow homeownership in a safe and affordable way. This should excite all Americans who are currently seeking to become homeowners and all those who will in the future, because maintaining access to low down payment mortgages continues to be critically important for millions of Americans to realize the dream of homeownership.

Last year alone, more than one million Americans purchased or refinanced a home using mortgages with private mortgage insurance (MI). They were able to overcome the widely held misconception that buyers need a 20 percent down payment, an amount that would take the average American family more than 20 years to save. Of the more than one million families that used private MI in 2018, nearly 60 percent were first-time homeowners who on average saved only 5 percent of the home purchase price as a down payment. Private MI allowed these borrowers to access the conventional mortgage market with sustainable, affordable mortgage options. In Washington, policymakers are currently exploring ways to help even more households realize homeownership the same way.

A new report showcases how private MI helps hard-working, home-ready families who access the conventional mortgage market, even when they don’t have a large down payment. The report highlights that in 2018, more than 40 percent of buyers with private MI had annual incomes below $75,000, and that there were significant wait times for prospective homebuyers attempting to save for a full 20 percent down payment. The report also underscores the significant mortgage credit risk protection that private MI provides to American taxpayers and the federal government.

The report, released by the U.S. Mortgage Insurers (USMI), finds it could take on average 20 years for a family earning the national median income of $61,372 to save 20 percent (plus closing costs) for a $262,250 single-family home, the national median sales price. However, this drops to seven years if the borrower uses a low down payment mortgage with five percent down. This represents a 65 percent decrease in wait time at the national level, and USMI found the same percentage decrease at the state level.

Unfortunately, today millions of Americans nationwide believe homeownership is out of reach. While there are many reasons for prospective homeowners to perceive homeownership as unachievable, including student debt or low wage growth, the most pervasive misconception is that they need to have a 20 percent down payment, according to the National Association of REALTORS. That is simply untrue. There are a variety of mortgage options available that can help prospective borrowers buy homes with as little as 3 percent down – such as conventional loans with private MI and government-backed loans like those insured by the Federal Housing Administration (FHA). Each option offers something different and has advantages and disadvantages, but as the new USMI report shows, private MI provides a safe and affordable way to buy a home for millions of families.

It is important for policymakers to understand the long, time-tested role MI has played as they seek to create a more robust housing finance system. Private MI serves as protection against mortgage credit risk if a borrower defaults on their mortgage. This means that every dollar a mortgage insurer covers when a borrower defaults is a dollar that Fannie Mae and Freddie Mac (the “GSEs”) and American taxpayers do not have to pay. In fact, since the 2008 financial crisis the MI industry has paid over $50 billion in claims – losses the government and taxpayers did not have to bear.

As the conversation continues over how to best increase American homeownership – a cornerstone of the U.S. economy – and protect taxpayers and the federal government along the way, this report provides valuable facts for the policymakers and regulators engaged in these discussions. The private MI industry’s long history of success in helping Americans qualify for low down payment mortgages highlights its critical role in the housing finance system, and we stand ready to do more to create a stronger and more sustainable housing market.

This column was published in The Hill on June 13, 2019.

Op-Ed: Private insurance plays a critical part in home mortgage ecosystem

Posted on by dcadmin

 

 

 

 

By Lindsey Johnson

2/17/19

Housing finance reform remains a priority in Washington. Earlier this month, Senate Banking Committee Chairman Mike Crapo (R-Idaho) released a proposal to reform the government-sponsored enterprises, Fannie Mae and Freddie Mac.

Like many other proposals, including House Financial Services Committee Chairwoman Maxine Waters’ (D-Calif.) HOME Forward draft legislation, Chairman Crapo’s proposal recognizes the important role that private capital — and specifically private mortgage insurance — serves to facilitate homeownership for low down-payment borrowers and protect taxpayers from mortgage credit risk.

The nominee for director of the Federal Housing Finance Agency (FHFA), Mark Calabria, recently appeared before the Senate Banking Committee as part of his confirmation process. He’s an individual who appreciates the benefits that private mortgage insurance extends beyond protecting the government and taxpayers.

Private mortgage insurance remains the longest serving, time-tested way to help low down-payment borrowers qualify for home financing in the conventional market.

Our nation’s mortgage finance system is one that must balance access to credit for consumers while also shielding taxpayers. Fortunately, private mortgage insurance is uniquely and permanently dedicated to serving both objectives through all economic cycles. As such, it should remain a critical piece of any future, reformed system.

Access to affordable, low down-payment mortgages is understandably top-of-mind for many policymakers. While there is an important role for government and taxpayer-backed programs to play in the broader system, any comprehensive reform should first encourage the greater use of private capital that ensures access to affordable low down-payment mortgages in the conventional market.

Fortunately, there is generally bipartisan agreement around this principle. Facilitating this kind of mortgage lending is precisely the purpose of private mortgage insurance, which has helped more than 30 million families secure home loans over the last six decades — many of whom were first-time or middle-income homebuyers.

Last year, more than 1 million homeowners qualified to purchase or refinance their home thanks to private mortgage insurance. Of these homeowners, nearly 60 percent were first-time homebuyers and more than 40 percent had incomes below $75,000.

Congressional leaders and the Trump administration must reform the housing finance system into one that works for all Americans by protecting taxpayers while also ensuring access to affordable mortgage financing.

The Harvard Joint Center for Housing Studies projected that the U.S. would add 13.6 million households between 2015 and 2025, which means affordable low down-payment options must be part of the equation.

Mortgage insurance companies support the government-sponsored enterprises and mortgage lenders in the origination of low- to moderate- income mortgage programs that address affordable housing needs of local communities.

The private mortgage insurance industry stands ready to continue its role as the solution to enable millions of families to achieve homeownership.

A version of this op-ed originally appeared in The Hill on February 17, 2019.

Blog: Mortgage insurance — added cost to homebuying or smart way to get in?

Posted on by dcadmin

The homebuying process is exciting, but can also seem fraught with added costs, like a home inspection, title insurance and closing costs. And if you can’t afford a full 20 percent down payment on a conventional home loan, then you will most likely pay for private mortgage insurance (MI). Some people consider private MI yet another added cost, but it helps creditworthy middle-income homebuyers qualify for home financing sooner with a low down payment. Is it really an added cost if it saves time and money in the long run?

For most people, low down payment home loan options include conventional loans with private MI and government-backed loans like those offered by the Federal Housing Administration (FHA). While comparable, each of these options has important differences. For example, the minimum down payment for an FHA mortgage is 3.5 percent while it’s only 3 percent on a conventional, privately insured mortgage.

Another key feature of private MI is that it can be canceled when a borrower reaches 20 percent equity in his or her home. Borrowers who purchase a home with private MI can typically cancel it within 5 to 7 years, resulting in their monthly bill going down. Private MI’s cancelability makes it a more affordable option over FHA-backed mortgages, which typically require mortgage insurance premiums for the entirety of the loan term. Both are offered by most mortgage lenders, so it’s smart to ask a loan officer for both options so you can compare and do the math.

The myth that a homebuyer needs 20 percent down to obtain a mortgage is simply not true. Low down payment mortgages are widely available and used every day across the country. In 2018, the National Association of Realtors found that first-time homebuyers typically put down 7 percent, while repeat buyers put down an average of 16 percent. Many homebuyers choose a lower down payment option to preserve some savings for home improvements or save for other goals. The time it could take to save up a 20 percent down payment is significant. On average, it could take up to 20 years to save a full 20 percent, plus closing costs, for a $257,700 house — the national median sales price. With home prices on the rise, the amount of time it takes to save up could only increase. Private MI can mean the difference between getting into the home of your dreams sooner or waiting for years.

For over 60 years, more than 30 million homeowners of all backgrounds have used private MI to successfully buy their homes. In the past year alone, private MI helped more than one million borrowers nationwide purchase or refinance a mortgage. According to a study by U.S. Mortgage Insurers, 56 percent of purchase borrowers were first-time homebuyers and more than 40 percent had incomes below $75,000.

For decades, millions of homeowners and prospective homebuyers have relied on private MI to help them affordably and responsibly purchase their homes — in turn helping them build personal wealth. Today’s historically low mortgage interest rates are a good reason to buy a home now. It is estimated that in 2019, the average rate for a 30-year fixed-rate mortgage will be around 5 percent. Borrowers should take advantage of these historically low mortgage interest rates because experts forecast that primary mortgage rates are on the rise.

Getting a mortgage with private MI and keeping more of your hard-earned money in the bank can be a very smart way to invest in your future. Check out lowdownpaymentfacts.orgto learn more.

Blog: Take a Second Look at Your Homebuying Options

Posted on by dcadmin

Buying a home is an exciting process, but for many people it can also seem out of reach. While many renters would like to buy, there are several factors that may lead potential homebuyers to believe they may not be ready. These include credit score requirements, income and debt levels, and the common myth that a 20 percent down payment is needed. Here is some good news: Qualifying for a mortgage may not be so far out of reach.

While it is true that borrowers with stronger credit profiles—FICO scores of 720 and higher, low debt-to-income (DTI) ratios, and cash reserves—generally receive better mortgage terms, there are products in the market that can enable access to affordable, prudently underwritten mortgage financing.

Down payment is routinely cited by prospective homebuyers as the largest hurdle to homeownership, but low down payment mortgages are widely available in today’s market. These include conventional loans with private mortgage insurance (MI) and government-backed loans like those insured by the Federal Housing Administration (FHA).

Many borrowers incorrectly believe that they need a 20 percent down payment to buy a home, but with private MI a borrower can qualify for a conventional home loan with as little as 3percent down. In addition to the competitive pricing of mortgages backed by private MI, private MI can be canceled when a borrower reaches 20 percent equity in his or her home. This added perk often makes private MI a more affordable option over other home loan programs—such as FHA-backed home loans—which require mortgage insurance premiums for the vast majority of borrowers for the entire term of the mortgage, which is often 15 or 30 years.

For more than 60 years, more than 30 million homeowners have used private MI to successfully buy homes and build the long-term wealth associated with home equity. In 2017 alone, private MI helped more than one million borrowers nationwide purchase or refinance a mortgage. According to a study by U.S. Mortgage Insurers, 56 percent of those borrowers who received purchase loans were first-time homebuyers and more than 40 percent had incomes below $75,000.

For decades, millions of homeowners and prospective homebuyers have relied on private MI to help them affordably and responsibly buy a home. Based on median home prices, it can take an average of 20 years to save for a 20 percent down payment. And with home prices dramatically on the rise, this wait time will only increase. Luckily, private MI can help you get into the home of your dreams sooner.

When making homebuying decisions, it is important to take a second look to make sure you are aware of all your options. Check out lowdownpaymentfacts.org to learn more.

Blog: A smarter way to buy a home

Posted on by dcadmin

Are you considering buying a home? With mortgage rates on the slow and steady incline, there may be no better time for a home purchase than now. Mortgage interest rates will likely continue to go up for the foreseeable future, according to recent data from the housing finance company Freddie Mac. Many housing experts and industry observers agree.

What does this mean?

If you are thinking about buying a home, it means don’t wait any longer. The overall cost of buying a home in the future will only increase compared to buying a home of the same value today. Furthermore, rising interest rates impact housing inventory, as sellers might not be as interested in moving if it means paying a higher rate on a new mortgage. As a result, the dream home you see today might not be available next year.

The 20 percent down myth

If you’ve put off buying your next home to save for the full 20 percent there is good news: you don’t need it. If you were unaware of this, you’re not alone. A recent survey found that among first-time homebuyers who obtained a mortgage, 80 percent made a down payment of less than 20 percent. While there are several low down payment mortgage options available, only one has a 60-year history of being a steadfast, smart way to get into a home: a conventional loan with private mortgage insurance (MI).

What is a conventional loan with MI?

A conventional loan is a mortgage from a lender that is not completely backed by the federal government. For qualified borrowers with a low down payment, private MI is required and typically paid monthly along with the mortgage payment. You can obtain this type of loan with as little as 3 percent down, though buying with a 5 percent down payment will result in a lower monthly payment.

There are other types of low down payment options that also include MI, such as the government-insured loans backed by the Federal Housing Administration (FHA). Unlike the premiums charged by FHA loans, private MI premiums can be cancelled once 20 percent equity in home value is reached, and with private MI there are no upfront costs added onto a borrower’s initial down payment like there are with an FHA loan. This means your monthly bill decreases and you have extra money to spend on your family, vacations, retirement and any other needs.

Don’t sit on the sidelines and miss out on your dream home. To learn more about mortgage insurance compared to other low down payment options, visit LowDownPaymentFacts.org.

Blog: Private Mortgage Insurance at 60 Years — Lindsey Johnson interviews USMI Board Chairman Pat Sinks

Posted on by Lindsey Johnson

By Lindsey Johnson

What was the driving force in 1957 that led to the inception of private mortgage insurance (MI)?

While the late 1950s was a time of great economic prosperity, the devastating effects of the Great Depression and World War II still impacted how financial institutions viewed risk. These institutions were leery of issuing mortgages with less than 20 or 25 percent down, unless the Federal Housing Administration (FHA) insured them. However, the red tape, expense, and regulations involved in working with the FHA made it impractical for many banks to lend and served as a barrier to homeownership for many low- to moderate-income borrowers. As a result of the precarious mortgage lending situation, a real estate attorney based in Milwaukee, WI named Max Karl sought a way to allow banks to more efficiently serve borrowers with low down payment loan options by insuring home loans with private MI. To do this, Karl founded Mortgage Guaranty Insurance Corporation (MGIC) and the rest is history.

Since 1957, how has private MI helped support homeownership?

Having mortgage insurance makes originating high loan-to-value (LTV) loans safer for the financial institutions we serve, allowing them to reduce their risk and lend to credit-worthy borrowers who bring less than 20 percent down to the table. This allows borrowers to become homeowners sooner than would otherwise be possible. It also allows homeowners to build the kind of long-term wealth that comes with having equity in a home.

Why should borrowers consider private MI?

I encourage borrowers to thoroughly explore all home loan options when buying a home; being well informed is the key to making the best choice based on one’s individual needs. That said, private MI offers an affordable and sustainable low down payment path to homeownership. What’s more, unlike some other low down payment programs, private MI automatically cancels once a homeowner reaches 78 percent equity in his or her home (or 80 percent equity upon request) and meets investor and/or Homeowner Protection Act requirements. This benefit of private MI can save homeowners thousands of dollars over the life of their loan.

How does private MI fit into the mortgage finance system?

Simply put, private MI helps reduce risk in the mortgage financing system by putting private capital in front of taxpayers and the federal government. Private MI does this by meeting a requirement established by Congress that low down payment loans sold to the government-sponsored enterprises Fannie Mae or Freddie Mac (the GSEs) have extra credit protection.

If the borrower defaults on their loan and there isn’t enough equity in the home to cover what is owed on the mortgage, private MI is there to offset the loss. With the GSEs in conservatorship and the government effectively guaranteeing the loans assumed on the GSEs’ balance sheets, taxpayers face direct exposure to mortgage credit losses experienced by the GSEs. When private MI is in place, private capital – not taxpayers – cover the first losses on a default up to certain coverage limits.

To give you an idea of what that means in real dollars, the private MI industry has paid more than $50 billion in claims for losses to the GSEs since they entered conservatorship during the 2008 financial crisis

What’s changed in the private MI industry over the past 60 years?

I like to say “this isn’t our father’s MI.” The private MI industry has been through a lot in its 60-year history. Most recently, we learned some valuable lessons during the Great Recession. Prior to that, the industry had never experienced a coast-to-coast collapse in the housing market. It’s true there have been times of great economic hardship during the industry’s history, but nothing as widespread as this most recent economic downturn.

While the private MI industry’s commitment to helping expand homeownership in an affordable, sustainable way remains steadfast, it has incorporated the lessons learned from the Great Recession into how it operates today. This includes the industry’s capital standards and how it views, evaluates, and prices for risk.

These lessons have made the private MI industry a stronger partner with its customers and it is in a great position for the future.

Speaking of the future, what do you see for private MI going forward?

The private MI industry is in the midst of a once in a generation opportunity to positively reform the country’s housing finance system. To do it right, there must be a comprehensive approach to evaluate what the proper role is for the GSEs, FHA, and private capital.

Private mortgage insurers are ready, willing, and able to take on a larger role in housing finance. The industry’s transparent, risk-adjusted capital requirements set it apart from other forms of credit enhancement, and that stability – coupled with 60 years of experience insuring high LTV-residential mortgages – puts it in a unique position to support the expansion of homeownership.

As our county’s leaders continue to explore housing finance reform, it only makes sense for them to consider how they can leverage the private MI industry’s inclusive and scalable business model.

Blog: Balancing Important Protections Provided by Improved Underwriting Standards with Reasonable Consumer Access to Credit

Posted on by dcadmin

by Patrick Sinks, President and CEO, MGIC and Chairman of USMI

Since the 2008 financial crisis, certain safeguards were put in place that resulted in more stringent underwriting standards for lenders and borrowers. As a mortgage insurer, lenders are my customers. For borrowers who don’t put 20% down – which is not a requirement – and are viewed by lenders as higher credit risk, mortgage insurers reduce or eliminate losses by providing protection to the lender in the event of a foreclosure. In doing so, mortgage insurance (MI) allows qualified homebuyers with low down payments (borrowers can put as little as 3% down with mortgage insurance) to qualify for mortgages because of the guarantee mortgage insurers provide to the system. If a borrower ends up suffering a foreclosure, we are in the so-called “first loss” position, and pay claims to the affected lender.

Today, there is a discussion in Washington about reforming some of the more far-reaching and costly regulations associated with the Dodd-Frank Act, including the Qualified Mortgage (“QM”) rule. To be sure, as a mortgage insurer, we have witnessed the difficulty within the mortgage lending sector to understand, implement, and comply with all the new rules and regulations, all the while ensuring mortgage credit remains available. Safe and prudent lending standards must remain intact throughout the system to avoid another housing crisis, though we must also ensure affordable mortgages don’t become out of reach for creditworthy buyers. There is a balance that must be struck. Three years after the QM rule was adopted, it is highly appropriate for industry and policymakers to ensure that there remains a balance between prudent lending and access to credit.

What the QM Rule Does

The QM rule for conventional mortgages, which was promulgated by the Consumer Financial Protection Bureau (CFPB), went into effect in January 2014 to protect borrowers, lenders, and the U.S. financial system, from risky lending practices that contributed to the housing crisis and its ripple effects throughout the economy.

Also known as the “ability to repay” rule, QM takes into account a borrower’s risk and financial situation, prohibits the use of some of the riskiest types of mortgage from the pre-2008 era, and provides legal protections for lenders if they meet strict underwriting standards.

Because of these features, qualified mortgages sold into mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac (government-sponsored entities, or “GSEs”), are designed as safer investments with less risk exposure to the federal government, and therefore create less risk to taxpayers. During the financial crisis, prior to the QM rule’s existence, the GSEs took a combined $187 billion taxpayer bailout when riskier mortgage loans that the GSEs guaranteed devalued, creating catastrophic losses.

How Does the Current QM Rule Work?

To prevent government and taxpayer exposure to such housing credit risk, the QM rule requires strong underwriting standards that take into account a borrower’s financial profile, such as credit score, as well as establishes requirements for processes that lenders must follow when originating a mortgage. According to the CFPB, the general requirements needed for making a qualified mortgage include:

  • Good-faith determination of a borrower’s “ability to repay” his or her mortgage
  • No excessive upfront fees
  • Elimination of certain loan features, including “interest-only” payment periods, negative amortization, balloon payments, and loan terms longer than 30 years
  • Legal protections for lenders

Why Lending Standards are Critical

The safeguards that came into the marketplace for borrowers, lenders, investors, and ultimately taxpayers with the implementation of the QM standard have been helpful in improving the credit quality of the housing market in the United States. Since the QM rule went into effect, the default rate on loans held by the GSEs has dramatically declined. For example, for mortgages originated at the height of the housing crisis in 2007, the cumulative default rate on loans held by Fannie Mae totaled 14.4%, while for Freddie Mac it was 8.3%. Following the enactment of the CFPB’s QM rule in January 2014, the cumulative default rates for the loans backed by the GSEs have fallen to nearly zero in 2015 and 2016. As noted before, while there have been improvements to credit quality, legitimate concerns are being raised by many stakeholders about whether mortgage credit has become too restricted. The average FICO credit score of a Fannie Mae and Freddie Mac low down payment borrower is over 750, which by all accounts is considered excellent credit. These questions on the access to credit underscore the need to review underwriting standards to ensure they do not overly restrict credit to creditworthy borrowers leaving the question of whether the pendulum has swung too far.

Uniform Lending Standards are Important

While consistency and uniformity are important to nearly all industries, there is a great need for uniform lending standards and rules in the housing finance industry. Currently, the CFPB and the Department of Housing and Urban Development (HUD) have QM rules that are not uniform, which leads to gross inconsistencies in the housing finance industry. For example, the Federal Housing Administration’s (FHA) upfront mortgage insurance premium is excluded from the QM rule’s cap on points and fees, while the private MI upfront premium is included. This inconsistency effectively precludes the financing of MI premiums into the loan amount, leading to higher monthly payments for borrowers. If the QM rules are changed, it should be to align underwriting standards for GSE-backed loans and loans backed by the FHA, which are 100% government-guaranteed. The same standards should be applied to both the GSEs and FHA, given they effectively serve the same low down payment borrowers.

Keep Prudent Lending Standards Intact

Mortgage insurers are required by law to build contingency reserves, meaning that in addition to the capital our companies are required to hold against the risk we insure, a portion of every premium dollar received is reserved specifically for emergencies on a countercyclical basis. In 2015, the Federal Housing Finance Agency (FHFA) implemented even stronger capital requirements called Private Mortgage Insurance Eligibility Requirements (PMIERs), which nearly doubled the amount of capital required for MIs to be approved to insure loans acquired by the GSEs. PMIERs, regulators affirm, reduce Fannie Mae and Freddie Mac’s risk exposure. The same can be said of the QM rule.

The MI industry fully appreciates the impact of the QM rule, and what it takes for lenders to conduct business within the boundaries of the rule, while working to provide access to mortgage credit to homebuyers. Lenders and others in the mortgage finance business are not the only ones impacted by new standards. New rules mean consumers could face different or tightened credit, making it longer to qualify for a mortgage. For some borrowers, new rules mean enhanced lending standards.

The QM rule has and will continue to be a solid foundation for responsible underwriting and borrowing in our housing system. As new housing policy or reforms to existing policies are considered, it is important that the foundations of the QM rule remain intact while also balancing the need to ensure creditworthy borrowers aren’t unnecessarily or unintentionally left on the sidelines.

Blog: The Lowdown on Low Down Payment Mortgages

Posted on by dcadmin

LowDownPaymentColumnPhoto

You would like to buy, but you can’t manage that 20 percent down payment. Does this sound familiar?

The down payment is the biggest impediment to buying a home according to surveys, but in reality many individuals can qualify for a mortgage with as little as 3 percent down.

It is important to compare loans and do the math. Consider your closing costs (the cash you need in-hand), the monthly mortgage payment, and if that payment will go down or up in a few years. Paying a few more dollars each month in the beginning can sometimes save borrowers money in the long term.

For this exercise, we compare a $234,900 home purchase (the national median home price as of December 2016), with a 5 percent down payment and a 720 FICO score. And because calculators and loan terms vary, consider these costs as examples only. A mortgage professional can provide you with specific estimates.

Conventional Loan with PMI

A conventional loan is a traditional mortgage from a lender that is not insured by a government agency. With a 5 percent down payment, the borrower finances the remaining 95 percent over 30 years with a 4 percent interest rate. Private mortgage insurance (PMI) is required because of the low down payment and is $78 of the monthly bill, making the total monthly mortgage payment $1,143.

Pros: A borrower can get a conventional loan with PMI with as little as 3 percent down. PMI can be cancelled once 20 percent equity in the home value is reached, which means your monthly bill decreases.

Cons: For some borrowers, a 5 percent versus 3 percent down payment may be a better deal as costs may be lower.  However, for many prospective homebuyers looking to lock in low interest rates, build equity and home appreciation faster, an option to get into a home with the lower down payment may be better.

A Combo Loan (aka Piggyback Mortgage)

A piggyback involves two separate loans simultaneously. In this scenario, the first “primary” mortgage covers 80 percent of the loan with a 30-year fixed interest rate of 4 percent; the second loan is for 15 percent with 10-year fixed interest rate of 5 percent; and the remaining 5 percent is the down payment. The total monthly mortgage payment would be $1,271.

Pros: The borrower will not pay PMI.

Cons: It may be a more expensive as the borrower will pay closing costs on two loans. And unlike PMI, the piggyback loan doesn’t cancel, but will be paid off over the term of the mortgage. The second loan often comes with higher interest rates too.

FHA Loans

FHA loans are mortgages insured by the government through the Federal Housing Administration. The limits for FHA loans typically are lower than conventional mortgages.  However, FHA mortgage insurance cannot be cancelled and must be paid for the life of the loan. FHA has other specific requirements, like the condition of the home. In this scenario, the mortgage is set at 95 percent of the home’s value with a 30 year fixed interest rate of 3.75 percent. The total monthly mortgage payment would be $1,199.08.

Pros: A borrower can get a FHA loan with as little as 3.5 percent down and a FICO score as low as 600 may qualify.

Cons: FHA mortgage insurance cannot be canceled, so your monthly bill won’t be reduced the way it is with a conventional loan with PMI. Also, FHA loans are subject to an upfront fee of 1.75 percent that is financed over the life of the loan.

No matter what you choose, do the math and compare so you can make an informed decision. If the conventional option sounds appealing, LowDownPaymentFacts.com provides more information.

Blog: What HUD’s Suspension of FHA MIP Rate Cut Really Means

Posted on by dcadmin

On Friday, January 20, 2017, the new Administration’s U.S. Department of Housing and Urban Development (HUD) suspended a January 9 announcement by the outgoing Obama Administration’s HUD and its Federal Housing Administration (FHA) regarding a planned reduction in FHA mortgage insurance premiums (MIP) for borrowers. (Note: the FHA is a 100% government-backed mortgage insurance program that, just like private mortgage insurance, guarantees mortgage lenders against default risk particularly for home loans originated with low down payments.)

The FHA MIP reduction was to take effect on January 27. Given the haste of this announcement, the incoming Trump Administration at HUD suspended this decision as to provide incoming officials sufficient time to better understand the potential impact—good and bad—such a reduction would have on the market.

There have been a number of reports and opinions shared on the recent suspension—and not all of them accurate. Below are additional facts and information on the decision to suspend the not-yet implemented premium reduction.  We hope you find it helpful. Please don’t hesitate to let us know if you have any follow up questions. Feel free to email us at media@usmi.org.

1. HUD’s decision does not raise the cost of homeownership in any way. The proposed FHA MIP reduction was announced by outgoing Obama HUD officials on January 9 and was scheduled to take effect on January 27. This proposed 25 basis points (bps) reduction has been suspended and, therefore, means there is no change to FHA premiums for new mortgage originations or refinances FHA mortgages. Since FHA premiums remain the same, the costs of an FHA-backed mortgage do not increase at all.

While some have been quick to criticize HUD’s recent action with politically-charged rhetoric, this is not a political or partisan issue. As noted in a January 24 Washington Post editorial, “the Obama administration itself increased this [FHA] fee four times between 2010 and 2013” before lowering the fee by 50 bps in 2015. The Washington Post goes on to say, “given recent financial instability—both at FHA and in housing generally—the new administration was perfectly justified in undoing it.”

2. With or without an FHA-insured option, there is wide availability today of low down payment mortgages backed by private mortgage insurance. Homebuyers have options; this includes low down payment mortgages with private mortgage insurance (MI). Unlike FHA-backed mortgages, the risk contained in loans guaranteed by private MI is not 100% exposed to the government and taxpayers. Private mortgage insurers put their own capital ahead of taxpayers to back mortgages that help homebuyers qualify for mortgage financing despite a low down payment or imperfect credit.

3. When comparing apples to apples, a low down payment mortgage backed by private MI is a better deal for homebuyers compared to FHA. First, cash for a down payment can be less for a private MI conventional mortgage compared to an FHA loan. Second, private MI can be cancelled thus lowering the monthly bill while FHA premiums generally must be paid for the full life of the mortgage.

In contrast to FHA insurance, private MI can be cancelled once borrowers have established 20% equity (through payments or home price appreciation). Ninety percent of borrowers cancel their private mortgage insurance within the first 60 months (five years). Why pay FHA insurance for another 25 years on a 30-year mortgage if it’s not necessary? The savings over time are significant.

The minimum down payment for FHA is 3.5% while a conventional private MI-backed mortgage can be originated with as little as 3% down. On a $234,900 home purchase (national median in December 2016), with a 4.25% interest rate for conventional and 4% for FHA, the FHA loan requires $1,175 more for down payment than the private MI loan. This goes to show that even with a higher interest rate the conventional loan still may be a better deal.

4. Experts (see below) point out that the FHA was stretched to the brink for nearly a decade, through the financial crisis, ultimately requiring a $1.7 billion taxpayer bailout. These experts argue that the capital levels required of FHA to shield taxpayers against losses, which is a thin 2% to begin with and has been underwater for several years, should not be thinned-out so quickly after it’s been restored back to health.

  • Housing policy experts at the Urban Institute debunk some of the quick claims about the negative impact of this HUD action. In a new blog they state: “A close look at the planned price reduction, however, reveals that the impact on the market would have been small and retaining the current price to help shore up FHA funds for a rainy day is a more prudent choice.” They also caution that the new lending volume at FHA would not come from unserved borrowers or homebuyers left on the sidelines, but instead borrowers already served by the low down payment conventional market.
  • On the opposite side of the political spectrum, scholars at the American Enterprise Institute (AEI) agree with Urban Institute on the forestalled FHA premium reduction. AEI scholars note that the last time FHA cut fees in 2015 it did not result in serving a new, previously unserved universe of homebuyers. AEI found, “almost half of these buyers— attracted by FHA’s lower monthly payments—were poached from other government agencies, mainly Fannie Mae or Freddie Mac. We also estimate that another third of the 180,000 buyers would have entered the market regardless of the lower premium, because an improving economy was raising incomes and lowering unemployment across the nation.”

5. Given privately insured mortgages are widely available and therefore homebuyers have options beyond FHA, the government program does not need to potentially increase risks to the American taxpayers. Below is a statement by Lindsey Johnson, USMI President and Executive director.

“HUD’s action allows the incoming Administration appropriate time to begin its work and to determine if an FHA mortgage insurance premium reduction is needed, and how it might expose taxpayers to undue risk. Given the wide availability of MI-backed low down payment mortgages and the fact that private MI is a better deal for borrowers over FHA since it can be cancelled, which in turn lowers monthly payments while FHA insurance must be paid for the life of the loan, there is no need for FHA to undercut the private market. While the FHA serves an important role in the housing market, it has expanded its footprint dramatically since the financial crisis and should instead remain focused on its core mission of serving underserved borrowers. USMI has and will continue to work with policymakers and housing officials to establish a more coordinated housing policy that will ensure broad access to low down payment lending while reducing the government’s footprint in housing and protecting taxpayers.”

Blog: An affordable way to qualify for a home loan without that big down payment

Posted on by Rhina Portillo

For many Americans, the biggest hurdle in buying a home is the 20 percent down payment they think is required for mortgage approval. According to a recent survey by the National Association of Realtors, 34 percent of respondents believe they need more than 20 percent.

Meanwhile, low down payment mortgages account for a significant amount of home buying annually.

Families with down payments as low as 3 or 5 percent have been able to purchase a home thanks to private mortgage insurance (MI) for 60 years. Since 1957, MI has helped 25 million families become homeowners. In the past year alone, MI helped more than 795,000 homeowners purchase or refinance a mortgage. Nearly half were first time homebuyers and more than 40 percent had incomes below $75,000.

How MI works

Mortgage insurance is simple. In addition to the other parts of mortgage underwriting process — such as verifying employment and determining the borrower’s ability to afford the monthly payment — lenders traditionally required 20 percent down to ensure the borrower had some of their own money committed before the bank would provide a loan. This is where MI enters, bridging the down payment divide to qualify borrowers for mortgage financing.

Benefits of MI

  • It helps you buy a home, sooner. For the average firefighter or school teacher, it could take 20 years to save the typical down payment. Private mortgage insurers help borrowers qualify with as little as 3 percent down.
  • It’s temporary, leading to lower monthly payments. MI can be cancelled once you build 20 percent equity, either through payments or home price appreciation — typically in the first five to seven years. This is not the case for FHA loans, the federal government’s form of MI. The majority of which require MI for the life of the loan.
  • It provides several flexible payment options. Your lender can offer several options for MI payment; the most common is paid monthly along with your mortgage.
  • It’s tax-deductible. Subject to income limits, MI premiums are tax deductible — similar to interest paid on a mortgage. In 2014, 4 million taxpayers benefited from this deduction with the average being $1,402.

MI is a stable, cost effective way to obtain low down payment mortgages, and offers distinct benefits to borrowers. It’s been a cornerstone of the U.S. housing market for decades, providing millions the opportunity to own homes despite financial barriers. Ask your lender for low down payment options using MI.

Blog: Time to Be Transparent about Fannie and Freddie Upfront Risk Fees

Posted on by Lindsey Johnson

Data show homeownership has become out of reach for many and that reducing or eliminating upfront fees is overdue.

By Lindsey Johnson

Eight years after the global financial crisis, the U.S. housing market still lags the recovery of the overall economy—and the homeownership rate is at a 50-year low.[1] While the new administration will have many housing related issues to address in the first few years, access to credit should not be overlooked. I was reminded of this and inspired to write this blog after reading a front page story in The Wall Street Journal on December 4 titled “Credit Restrictions Cost Home Buyers ‘Deal of a Lifetime.’”[2]

Following the financial crisis, policymakers aimed to eliminate the riskiest mortgage products on the market and shore up the financials of those institutions that make up the housing industry. And, while we cannot turn our eyes away from safety and sound mortgage lending nor can we ever allow any of the riskier types of mortgages to return that led to the financial crisis, the pendulum has swung too far in some areas. To truly address concerns about consumers’ access to mortgage finance, a number of areas of government policy need to be discussed including: 1) the GSEs’ guaranty fees (“g-fees”) policy that was adopted after the financial crisis; 2) GSE Loan Level Pricing Adjustment (LLPA) fees that were added to g-fees during the crisis; 3) private mortgage insurers’ new Private Mortgage Insurer Eligibility Requirements (PMIERs) that were established by the GSEs; and 4) the Federal Housing Administration’s (FHA) pricing and underwriting practices. We will explore many of these topics in future writings, but will focus on one specific aspect here—LLPAs.

Fannie Mae and Freddie Mac charge g-fees, which are the fees borrowers pay to have their mortgage backed by the Federal government through the GSEs. In 2008, the GSEs added LLPAs to further shield the GSEs against the risk of defaults. These crisis-era fees were levied on homebuyers in addition to other fees and costs for managing their risk, based largely on two factors—credit score and the size of their down payment—and most borrowers do not even know about these additional fees. The current president of the National Association of Realtors (NAR) put it best in an American Banker column when he stated “homebuyers are paying a steep price at the closing table in the form of unnecessary fees that, for some, put homeownership out of reach.”[3] Without being transparent about these so-called upfront risk fees, LLPAs will continue to exacerbate a serious concern over the efforts to re-balance these fees in a post-crisis environment.

Low-down payment programs are designed for families who need the help, but the impact of LLPAs on the cost of Fannie or Freddie-backed low-down payment mortgages has been chilling. The Wall Street Journal reports that, “Fannie and Freddie increased fees for riskier borrowers, widening the gap between mortgage rates available to borrowers with good and weak credit.”

This is indeed true. The Treasury Department noted in a recent report, the “credit score of the typical new mortgage borrower is nearly 40 points higher than the typical borrower in the early 2000s.” The “average credit score for those obtaining a loan backed by Fannie Mae and Freddie Mac…in conservatorship is nearly 750”—near perfect credit. And the “loan-to-value” is 80%, which means average down payments are roughly 20% of the home purchase price. These facts are “especially sobering given the fact that more than 40% of all FICO scores nationally fall below 700.”[4] I would argue that these trends mean there are many creditworthy families of all socioeconomic backgrounds deserving of conventional mortgages who are simply unable to buy their first home!

Costs of LLPA Fees on Homebuyers and Taxpayers

LLPAs impose significant costs on homebuyers and disproportionately harm first-time homebuyers and those without large down payments. If a homebuyer puts down 5% on a $200,000 home, and the borrower has a 660 FICO score and is applying for a $190,000 mortgage, then the upfront LLPA is 2.25% on this loan. The borrower will pay for this by either bringing $4,275 additional funds to closing (190,000* 2.25%) or accepting a 0.50%-0.55% higher interest rate. That higher interest rate translates to an additional $50 per month on your mortgage payment. Over 5 years that is more than $3,000 in additional interest and over the life of the loan the borrower pays more than $18,000 in additional interest.

USMI was one of 25 organizations that wrote to FHFA Director Mel Watt in June about the need to eliminate or reduce these arbitrary crisis-era fees. Fortunately, since the financial crisis, defaults have gone down for a variety of reasons, not the least of which is the fact that new underwriting rules have dramatically improved the quality of the GSE portfolio of new home loans, meaning there is a whole lot less risk on the GSEs’ books as these mortgages are performing well. Yet while the cumulative default rate has decreased from 13.7% to almost zero, GSE g-fees, which include LLPAs, have nearly tripled since the mortgage crisis. Therefore, these arbitrary fees are being imposed on borrowers, even though lending is safer and the fact that private mortgage insurance already mitigates the risk the borrower may not repay their loan. Essentially, LLPAs are double charging the borrower for the same risk. The data simply does not justify these fees anymore.

FHFA Responds…

Director Watt’s August 1 response to the 25 groups who called for FHFA and the GSEs to reduce or eliminate these LLPA fees was that “although positive developments in the mortgage market continue to occur, we believe the current g-fees and LLPAs continue to strike the risk balance.”[5] However, speaking at the MBA’s Annual Convention & Expo in October, Director Watt acknowledged that the post-2008 recovery in the housing market has been “disappointingly uneven” in many areas of the country. Not only has the recovery been slower for urban and low-income communities, but these same communities continue to have the hardest time achieving homeownership today.

NAR said in the American Banker column that the GSEs are “charging homeowners for far more risk than they [the GSEs] took on, driving tremendous profit.” The GSEs have paid more than $200 billion to the U.S. Treasury in recent years; given the GSEs are under conservatorship and are mandated to go to zero capital by 2018, the GSEs should continue to focus on providing access to credit for a broad range of borrowers.

The GSEs have a mission to “promote homeownership, especially access to affordable housing.”[6] It is time to eliminate or reduce these unnecessary fees and bring down costs for homebuyers, considering most low-down payment mortgages already come with private mortgage insurance protection—risk that Fannie and Freddie do not have to bear. Private MI has covered first loss mortgage credit risk ahead of American taxpayers for 60 years and mortgage insurers are ready to do more.

[1] Census Bureau

[2] http://www.wsj.com/articles/credit-restrictions-cost-home-buyers-deal-of-a-lifetime-1480874593

[3] http://www.americanbanker.com/bankthink/fees-meant-to-shield-gses-from-risk-are-hurting-homebuyers-1091054-1.html

[4] Antonio Weiss and Karen Dynan, Housing Finance Reform: Access and Affordability in Focus https://medium.com/@USTreasury/housing-finance-reform-access-and-affordability-in-focus-d559541a4cdc#.gu5ifppus

[5] Mel Watt, FHFA Letter to Stakeholders on LLPAs

[6] Chairman Ben Bernanke, ICBA Conference Speech: GSE Portfolios, Systemic Risk, and Affordable Housing https://www.federalreserve.gov/newsevents/speech/bernanke20070306a.htm