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.
Last month, the oldest and largest private insurer of home loans, Mortgage Guaranty Insurance Corporation, issued a bombshell warning 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 non-owner-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 and 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:
• Homebuyers 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 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 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. The income restriction is intended to discourage “stated income” applications from people who could readily furnish pay stubs or W-2 tax forms, but choose not to do so.
•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 to 2005 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. MGIC estimated that it lost $1.3 billion during the fourth quarter of 2007, consisting of actual cash losses of $280 to $290 million, and slightly more than $1 billion in additions to reserves, according to Michael J. Zimmerman, senior vice president for investor relations.
MGIC’s retrenchment parallels recent moves by mortgage lenders, ranging from investors Fannie Mae and Freddie Mac to 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 when all the arrows were pointing up 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: 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 even 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.
Ken Harney is a real estate columnist with the Washington Post.