Mortgage Insurers Start Re-Digging Grave

Private mortgage insurance, often referred to as PMI, can be one of the most confusing aspects of financing a home. The buyer is required to pay PMI if they have less than a 20 percent down payment, but if they default on the mortgage, it is the bank that files a claim with the insurer, and you get nothing for all those fees you paid.

PMI used to be non-deductible, so lenders created 80/20 piggyback loans to help buyers avoid paying PMI, which helped if not caused part of the foreclosure and credit crisis in which we are still in.

Most borrowers who had less than 20 percent to put down have been using FHA loans for the past two years, which allows you to put down just 3.5 percent. And if you have 20 percent to put down, then you don't need PMI. So the range of mortgages where
PMI is relevant is strictly between 3.5 percent down and 20 percent down.

Now, the private mortgage insurers are trying to re-take some of their turf, according to the Wall Street Journal, in a sign that could be viewed as a vote of confidence for the housing market, or as the reinflation of the bubble-driven mentality that got us here.

The PMI providers, including Mortgage Guaratee International Corporation or MGIC, had restricted the loan to value ratios they would support to below 90 percent in what they called "distressed" or "declining" markets. So if you were a borrower in that range between 90 percent LTV (or 10 percent down) and 95 percent LTV (or 5 percent down), you really had no option but to go FHA.

As of early December, cities such as New Orleans, Akron, Ohio, and Dover, Del., were removed from MGIC's "distressed" list. This followed cities such as Denver and St. Louis in September. So, you can now get PMI with as low as a 680 credit score and 5 percent down.

Genworth Financial has removed all but five states from its distressed list, with the five states being California, Arizona, Nevada, Michigan and Florida. So no signs of life in those states.

The good news is this means less people are going to have to use FHA financing, which is on the brink of bankruptcy as it is. FHA mortgages can also have fairly high fees, so paying PMI might be more advantageous for some buyers.

The bad news is that these aren't exactly "prime" borrowers, with credit scores below 700 and just 5 percent down payment.

But I guess that's what insurance is for, protecting from things going bad.

Only in this case, the insurance protects the banks and not the consumer.
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