Mortgage insurer cracks down; California feels the heat

WASHINGTON – 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.

The oldest and largest private insurer of home loans – the Mortgage Guaranty Insurance Corp. – issued a bombshell warning Feb. 6 that, in large parts of the country, it would no longer provide coverage on popular cash-out refinancings, reduced-documentation loans, mortgages with down payments of less than 5%, loans for rental houses or other non-owner-occupied investor properties, and mortgages with negative-amorti- zation features, such as payment-option loans.

The bans, which take effect March 3, cover four states in their entirety (California, Arizona, Florida and Nevada), plus the District of Columbia and 25 other major real estate markets including Denver, Baltimore, Boston, Chicago, Detroit, Minneapolis, the Long Island and New Jersey suburbs of New York, Portland, Ore., and Tacoma, Wash.

The key underwriter also tightened eligibility standards across the nation on a number of low-down-payment loan categories:

* Home buyers who seek mortgages with less than 5% down must now have minimum Fair Isaac & Co. credit scores of 680, up from the previous 620.

* Cash-out refinancings on all non-owner-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%, have FICO scores of 660 or higher and be able to demonstrate that at least 50% of their annual income is derived from self-employment. The income restriction is intended to discourage “state-income” applications from people who could readily furnish pay stubs or W-2 tax forms but choose not to.

* All condo buyers in declining markets will need to come up with 10% down payments. Buyers of single-family homes in those areas with less than 10% down payments will need FICO scores of 680 or higher.

Milwaukee-based Mortgage Guaranty Insurance Corp. is a giant in the industry with nearly $200 billion in insurance coverage 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% borrower equity. Competitors are expected to adopt their own versions of at least some of the underwriter’s cutbacks in the coming weeks.

Private mortgage insurers played a key role during the housing boom years of 2001-05 by helping millions of people with modest incomes and marginal credit purchase homes with minimal down payments. But now, the industry is facing rising claims on loans that went sour. The Mortgage Guaranty Insurance Corp., for example, estimates it lost $1.3 billion during the fourth quarter of 2007, said Michael J. Zimmerman, senior vice president for investor relations.

The underwriter’s retrenchment parallels recent moves by mortgage lenders, including Fannie Mae and Freddie Mac as well as regional banks. Most of them are now restricting the hyper-creative financing that powered the boom – zero-down, no-documentation, minimum-payment plans and speculator loans – especially in markets where appreciation rates and prices spiraled off the charts. Essentially, the industry is saying: We were willing to go with the flow during the boom years, but now that party is over.

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, plus they may find certain types of loans – for vacation condos and small-scale rental-investment properties, to cite just two – unavailable.

The major bright spot still left for purchasers seeking a home with low down payments: The Federal Housing Administration’s program has no connection with private insurance. Borrowers can still put 3% down and qualify for a fixed-rate, 30-year FHA loan that comes with consumer-friendly credit, debt-ratio and other underwriting terms.

A new federal economic stimulus package raises the maximum amounts for FHA mortgages – great news for California, the Northeast, Florida and the mid-Atlantic states. Pending congressional legislation would even sweeten the deal by reducing minimum down payments well below 3%.

On the flip side, the FHA is a little old-fashioned in some respects. Be prepared to document your income, your assets and your 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.

Comments for Kenneth R. Harney can be sent to kenharney@earthlink.net.