First it was the lenders. Now it's the mortgage insurance industry: Entire product lines are being yanked off the real estate financing shelf, potentially squeezing large numbers of buyers and refinancers out of the marketplace.
On Feb. 6, the oldest and largest private insurer of home loans - MGIC - announced that, in large parts of the country, it will no longer provide coverage on cash-out refinancings, reduced-documentation loans, mortgages with down payments less than 5 percent, loans for rental houses or other nonowner-occupied investor properties, and mortgages with negative amortization features, such as payment-option loans.
The bans, which take effect March 3, cover four states in their entirety, the District of Columbia, plus 25 other major real estate markets. The states are Arizona, California, Florida and Nevada. Metropolitan markets on the list include Denver, the Maryland and Northern Virginia suburbs of Washington, D.C., Atlanta, Baltimore, Boston, Chicago, Detroit, Minneapolis, the Long Island and New Jersey suburbs of New York, Portland, Ore., and Tacoma, Wash.
MGIC also tightened eligibility standards nationwide on a number of low-down-payment loan categories:
- Buyers who seek mortgages with less than 5 percent down must now have minimum FICO credit scores of 680, up from the previous 620.
- Cash-out refinancings on all nonowner-occupied rental or investment properties no longer will be eligible for insurance, no matter how high the borrower's credit scores.
- Borrowers who seek to use reduced documentation plans must now make minimum down payments of 10 percent, have FICO scores of 660 or higher, and be able to demonstrate that at least 50 percent of their annual income is derived from self-employment.
- All buyers of condominiums in declining markets will now need to come up with 10 percent down payments. Buyers of single-family homes in those areas with less than 10 percent down payments will need FICOs of 680 or higher.
Milwaukee-based MGIC is a giant in the industry with nearly $200-billion in insurance coverage in force on 1.3-million mortgages. Like other private mortgage underwriters, it provides lenders protection against losses on low-down-payment loans - those with less than 20 percent borrower equity. Competitors are expected to adopt their own versions of at least some of MGIC's cutbacks in the coming weeks.
Private mortgage insurers played a key role during the housing boom years of 2001-2005 by helping millions of people with modest incomes and marginal credit to purchase homes with minimal down payments. But now the industry is facing rising claims on loans that went sour. MGIC, for example, estimates that it lost $1.3-billion during the fourth quarter of 2007, consisting of actual cash losses of $280-million to $290-million, and slightly more than $1-billion in additions to reserves, according to Michael J. Zimmerman, senior vice president for investor relations.
What are the emerging cutbacks likely to mean in practical terms? They could be felt almost immediately by buyers who can't come up with substantial down payments. They'll need higher FICO scores, and they may find certain types of loans unavailable, such as for vacation condos and small-scale rental investment properties.
The major bright spot still left for purchasers seeking a home with low down payments: FHA. The Federal Housing Administration's insurance program has no connection with private insurance. Borrowers can still put 3 percent down and qualify for a fixed-rate, 30-year FHA loan that comes with consumer-friendly credit, debt-ratio and other underwriting terms.
The new federal economic stimulus package raises the maximum mortgage amounts for FHA, great news for California, the Northeast, Florida and the mid-Atlantic states. Pending congressional legislation would sweeten the deal by reducing minimum down payments well below 3 percent.
On the flip side, FHA is a little old-fashioned in some respects. Be prepared to document your income, your assets and debts. And don't even think about payment-option plans, interest-only, negative amortization and other funny money techniques that were all the rage a few years ago.
Kenneth R. Harney can be reached at firstname.lastname@example.org.