Private mortgage insurance information and a short PMI history lesson. With the financial success of the FHA’s Section 203(b) loan insurance program was not lost on private industry.
In the late 50’s, the Mortgage Guaranty Insurance Corporation (MGIC) was formed as a privately owned business venture to compete with the FHA in insuring home mortgage loans. In the late 60s several things happened that allowed MGIC to enjoy a sudden burst of growth. The first was a red-tape snarl at the FHA that resulted in loan insurance applications taking 4 to 8 weeks to process, much too long a wait for sellers, buyers, brokers, and lenders who were anxious to close. In contrast, MGIC offered 3-day service. Then, too, FHA terms were not keeping up with the times; moderately priced homes required larger down payments with FHA insurance than with private insurance, and the FHA-imposed interest rate ceiling hindered rather than helped many borrowers. Also, private mortgage insurance (PMI) was priced at less than the FHA was charging. Then in 1971 the Federal Home Loan Bank Board, overseer of savings and loan institutions, approved the use of private mortgage insurers. By 1972 private insurers in the United States were regularly insuring more new mortgages than the FHA.
Success spawns competition, and by 1983, 13 private mortgage insurance companies were insuring loans. MGIC, however, is still the dominant force in the industry. Like FHA insurance, the object of PMI is to insure lenders against losses due to nonrepayment of low down-payment mortgage loans. But unlike the FHA, PMI insures only the top 20% to 25% of a loan, not the whole loan. This allows a lender to make 90% to 95% LTV loans with about the same exposure to foreclosure losses as a 72% LTV loan. The borrower, meanwhile, can purchase a home with a cash down payment of either 10% or %5. Under the 10% down payment program, the borrower pays a mortgage insurance fee 1/2 of 1% the first year and 1/4 of 1% thereafter. The 5%-down program costs the borrower 3/4 of 1% the first year and 1/4 of 1% annually thereafter. When the loan is partially repaid (for example, to a 70% LTV), the premiums and coverage can be terminated at the lender’s option. PMI is also available on apartment buildings, offices, stores, warehouses, and leaseholds but at higher rates than on homes.
Private mortgage insurers work to keep their losses to a minimum by first approving the lenders with whom they will do business. Particular emphasis is placed on the lender’s operating policy, appraisal procedure, and degree of government regulation. Once approved, a lender simply sends the borrower’s loan application, credit report, and property appraisal to the insurer. Based on these documents, the insurer either agrees or refuses to issue a policy. Although the insurer relies on the appraisal prepared by the lender, on a random basis the insurer sends its own appraiser to verify the quality of the information being submitted. When an insured loan goes into default, the insurer has the option of either buying the property from the lender for the balance due or letting the lender foreclose and then paying the lender’s losses up to the amount of the insurance. As a rule, insurers take the first option because it is more popular with the lenders and it leaves the lender with immediate cash to re-lend. The insurer now has the task of foreclosing.
Private Mortgage Insurance To Loan Points