Where does it all end? The snowball effect continues to throw cold water on the entire home loan industry. Things started off with the subprime bombshell, which was soon followed by the rapidly rising foreclosure rate, then large investors purchasing bundled mortgage products on the secondary market got sucked in and now it's the mortgage insurance segment's turn. These sectors, and possibly others, are all being called on the carpet to answer for their sins.
Mortgage insurance companies offer coverage to lenders who underwrite loans with less than 20% borrower down payment or, in case of a refinance, under 20% owner's equity. In case the homeowner defaults, the insurance will come in to bail the lender out. Without them the recent residential real estate joyride would've been practically impossible since their policies enabled borrowers with weak credit to buy homes with no or low down payments.
The mightiest of them is MGIC which absorbed nearly $1.5billion in losses in the fourth quarter of 2007. That evidently prompted it to take a critical look at its underwriting criteria and then decided to drastically amend them. Starting in March it'll cease insuring cash-out refinances, low-doc paper, loans on investor properties and negative amortization mortgages. These guidelines do affect the entire states of Arizona, California, Florida and Nevada, the famous hardest-hit foursome, and also apply to nearly two dozen metropolitan areas. In other words, it's not a nationwide shift, merely covering markets that are most troubled for now.
Obviously the mortgage industry itself and related services supporting it are rolling back many innovative products and procedures they introduced to the marketplace several years ago. They fueled unprecedented buying opportunities in many regions, but the risk assessment on them was clearly a large gamble and as is now known, the gamble failed to pay off. MGIC's action will further pinch home purchase and refinance activity and is likely to delay an even, sustainable recovery.
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Provided by:
Esko Kiuru
Mortgage and real estate market commentator
www.BluefoxToday.com - syndicated mortgage and real estate blog
eskokiuru@gmail.com
My cell: 702-499-1006
Hi Esko, Maybe you already know this, not sure, but on March 3 RMIC, PMI, RADIAN have stated that anyone with a 620 Fico score or less will only be eligible for loans under 80% LTV or 20% downpayment. This is going to hit First Time Buyers, Minorities, Divorced folks (with challenged credit due to divorce) etc. I am having the worst week ever because of it. Currently have a single, divorced, Asian-permanent resident alien, father of 2 young kids and first time buyer with a 595 fico score. He has 10 years on the job with $28,000 in a 401K. Great credit for the past 24 months. He is approved right now with 5% down, but next week he will be required to put 20% down.
I hope people would understand the ramifications that this will have on the purchase market. FHA is not poised to Save the Day. The MI companies are calling the shots, insurance is king. They are not doing this country any favors. There really isn't anything anyone can do, right?
Esko, need you to clarify one thing for me on the Cash-Out-Refi, are you saying that MGIC will not do any Cash-Out-Refi's regardless of LTV's???
Sarah,
Due to their losses they had to make the adjustments.
Julie,
It'll tighten things up a bit more.
George,
MGIC should be able to provide details on how exactly it works.