Mortgage Biz: Fewer choices, fewer deals ahead as insurers cut off third party originators

In what they say is an effort to reduce risk, private mortgage insurers plan to cut off or curtail third party originated loans beginning in early March, DailyFinance has learned. That decision will make it much harder to get a loan through an independent mortgage broker, where banks compete for customers by offering various loan programs that can be originated through a third party.

By reducing the competition and forcing people who want to put less than 20% down to work with a bank, anyone who needs private mortgage insurance will likely be forced to apply directly through a major lender. Cutting out competition is a sure way to guarantee higher rates for those still able to play in the mortgage lending marketplace.
"PMI plans to eliminate third party originations due to market conditions," Tom Taggart, Vice President of Public Relations for the PMI Group, told me by telephone this afternoon. He said PMI was faced with "severe capacity constraints." It needs to manage its volume, risk and available capital. Obviously its biggest and best customers are who it plans to serve. Mortgage brokers who have a "correspondent relationship" with the major banks will still be able to originate loans.

MGIC, another major player in the private mortgage insurance market, issued an advisory on Feb. 9, 2009, indicating it will put strict constraints on third-party originated loans. In its bulletin, it indicates that banks who take third-party originated loans will have to put an identifier on the loan acceptable to MGIC. Senior VP of Investor Relations for MGIC, Mike Zimmerman, said they do not plan to cut off third party originators, but they do want the major banks (or aggregators) to collect performance information on these originators.

"This is something they should have been doing all along. The data is in the system to be able to look at an originator's performance, such as their delinquency and foreclosures rates." As long as the major bank or aggregator is willing to give MGIC the third party originator's identifier data, they will still be able to get insurance for third party originated loans. MGIC's position is much more reasonable than PMI's total cutoff of third party originators. If the bank does not want to give information about a third party originator they will have to tag those loans and than MGIC insurance will only insure loans of 90% loan-to-value (LTV) and applicant credit score of 720.

These changes will make it more difficult to get a mortgage with less than 20% down unless your FICO score is over 720. The good news for those of you that can't get private mortgage insurance is that you may be able to qualify for an FHA loan. Zimmerman also points out that another source of loans will be "credit unions, community banks and mortgage bankers that close the loan in their own name."

Thomas Martin, President of AmericasWatchdog, sees this as a move to "eliminate mortgage brokers." He thinks this change will essentially "put mortgage brokers out of business in the U.S." He sees PMI as being a "stooge" for the big banks. When you pull away the curtains from this move, you'll find that mortgage brokers must report their yield spread premium, which is a essentially a kick back to the brokers for writing a loan. This yield spread premium actually increases a person's interest rate ultimately increasing their mortgage payments for the life of the loan. Banks are not required to disclose their yield spread premiums.

So Martin believes that by getting rid of the mortgage brokers, the banks won't ever have to let people know about the kickbacks they get. Martin said "Congress will do anything the banks want during this crisis, so it's a good time for them to take care of this problem right now." He also believes banks have used the economic crisis to "cast mortgage brokers in a crummy light," so Congress won't see what's really behind this move.

The bad news for everyone looking to get a mortgage is that with fewer people able to do loan origination, the costs of getting loans will likely go up. Major lenders will have a lock on the market and by squeezing out the smaller players, you can be sure that great deals spawned by competition will evaporate.

Lita Epstein has written more than 25 books including "The 250 Questions You Should Ask About Buying Foreclosures" and the "Complete Idiot's Guide to Improving Your Credit Score."
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