MGIC Reduces Mortgage Insurance LTV’s in CA, NV, AZ and FL…This Leaves Two

Posted on August 4th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

There could be a big problem brewing for the housing market. One that many may have not considered.  Could a large portion of the purchase market and a good chunck of Fannie and Freddie’s loan production in four states with the largest housing markets ride with two of the smaller sized mortgage insurers?

MGIC, following in the footsteps of most of their competition, reduced the allowable loan-to-value (LTV) ratios for mortgage insurance in CA, NV, AZ and FL to 90% effective today from 95%.  (Please see state restriction memo). 

If the remaining two mortgage insurers who allow over 90% in these states, Radian and RMIC, follow MGIC’s lead it would further depress their housing markets because it requires all borrowers to put more money down on purchases or bring in more money on refinances.  GE, UGI, Genworth and PMI only go to 90% and Radian and RMIC are smaller companies, so it is not inconceivable that they will not want to be the last ones on the block doing high LTV deals and soon follow suit. 

This past May Fannie and Freddie said they are ‘doing away with their declining value’ restrictions nationally. Until this time, the Agencies had reduced maximum allowable LTV’s in areas they deemed to be ‘declining’ to 90%, which just so happened to include these four states.  This move to remove the restrictions was cheered by the press, Solon’s, real estate professionals and Wall Street as being a critical piece in saving the housing market.

This is another perfect example of why you can’t read the headlines. Even though Fannie and Freddie may still allow 95% LTV in CA, NV, AZ and FL unless the mortgage insurers will them, the lenders can’t originate them and it is of no benefit to the housing market.

These states need EXPANDED guidelines, not contracted. This MGIC news means that many lenders who use MGIC as their primary mortgage insurer will have to scale back their loan offerings in response or use Radian and RMIC, which are the only remaining companies left writing policies in these states up to the Fannie/Freddie maximum allowable LTV.

The question is, will Radian and RMIC who are smaller companies want all of this risky spill over business or will they follow the big boys out of high LTV loan arena.  In addition, given their smaller size will the  banks want to take on the counter-party risk in doing business with these firms.  If these companies fail, then the banks would be on the hook for the defaulted loans. Time will tell.

Due to the fact that most of the mortgage business from 90.01% and up in four states with the largest real estate market rides on the shoulders of these firms, we will keep a close eye on Radian and RMIC, that’s for sure.-Best Mr Mortgage

New MGIC Restricted States Parameters for CA, NV, AZ and FL

 

13 Responses to “MGIC Reduces Mortgage Insurance LTV’s in CA, NV, AZ and FL…This Leaves Two”

  1. What kind of insanity is it when lending/insuring on non-recourse terms at even 90% LTV in markets falling at least 20% pa.

  2. I agree with G Cox.

    Considering that a further decline of 15% to 25% in California home prices can be expected, Mortgage insurance should be required for 80% LTV and higher. And 25% down should be required on all jumbos.

    California is a non-recourse state where purchase money loans can only look to the collateral.

    If we had kept to the old rules where PMI was required for greater than 80% LTV and where 10% down with full doc was required for that 90% LTV.
    We would not be in the problem we are in.

    Can your banker name the five C’s of Credit?

    Character, Capacity, Capital, Collateral, and Conditions.

  3. because I know nothing about these things.. what was the LTV before now? Or what is it for those two smaller companies?
    What was it during the peak times of the bubble?

  4. Funny about those four states. This article on the AEI web site eliminates just those four to get a sort of “core” housing picture that isn’t that bad.

    “Housing Collapse Ahead? Not According to the Data”
    http://www.aei.org/publications/filter.all,pubID.28418/pub_detail.asp

    If you torture the numbers, they’ll tell you anything you want to know.

  5. I think on a traditional 30-year fixed mortgage the LTV must be at least 80/20, at least 20% down. Though that might have changed during the bubble years.

    For MGIC to alter its requirement from 5% down to 10% down (with the other insurers YET to follow suit) means we STILL have a looong way to go before true sanity returns to this picture.

    Why do I get a feeling the mortgage insurers are going to go the way of the dinosaur?! (wiped out by a financial meteor)

  6. Mr. M. I have to hand it to you!!! Spot on and wise!!! As usual ahead of the curve… I had heard and read about this, but did not have enough to consider it valid. You truly are one of the “BEST”

  7. Not sure about the other states, but here in FL the ‘effective’ LTV rate was cut to below 90% by the lenders’ tightening credit policies months ago. Sure there were a few individiuals with plenty of reserves that would qualify for higher LTVs, but the average joe sixpack was/is out of luck. The mortgage insurers already stopped insuring condos effectively cutting the max LTV to 80%. Those with little or no down payment, who probably shouldn’t be buying a house anyway, are forced into FHA.

  8. It was only one year ago that the Bank Stocks started to crack – see the charts – even though anyone that was OBJECTIVE saw the FINANCIAL STOCK BUBBLE in the banks, brokers, builders, insurance companies, mortgage companies every entiy that was involved in the BUILDING BUBBLE.

    The FED & the Government have in 12 months bent every rule and virtually outlawed being a BEAR on what many call the FIRE economy = Finance Insurance & Real Estate.

    BUT none of the tricks will work because:
    Consumption is Value Destruction.
    Production is Value Creation.

    The Housing BOOM was really a CONSUMPTION based event. No different than $5.00 Coffee.

  9. re: “Forced into FHA”. For situations where the max allowable FHA loan is sufficiently large, FHA financing would generally be considered better for the borrower: only 3% downpayment (soon to be 3.5%), mortgage insurance that’s cheaper overall than conventional, pricing that’s better than a conventional loan (particularly in light of the conventional credit-score “risk-based” pricing, where a 719 score is considered “bad”), and lastly, FHA loans are assumable. A buyer getting a 6% assumable fixed rate today will have an easier time selling their house in 5 years if the prevailing rate is 8.5% at that time. FHA doesn’t work for every situation, but when it can, it’s generally better than conventional. Pity those who “have to go conventional”.

  10. dafox,

    LTV for a long time was 80% (or 20% down) for loans not requiring an escrow account and not requiring mortgage insurance (PMI). LTV was 90% (or 10% down) otherwise, plus you had an escrow account into which you paid monthly to cover taxes and insurance plus you also paid PMI. However, with 30% down or 70% LTV a loan could be had for those who were self-employed or had other documentation problems.

    During these times various “Nothing Down” courses were sold to show you how to get arround this by getting the owner to “finance” the rest.

    Recently 0% down, 100% LTV, and no documentation became the rule, that is the buyers had no skin in the game. In fact in Great Britain, Northen Rock wrote 125% LTV loans so you could fix up the place. “Liar Loans” (no documentation of income) became the norm so that with an income of $14,000.00 you could qualify for a $750,000.00 loan by the clever moving of a decimal point.

    In Germany, 50% LTV and 50 year mortgages were common, thus their prices did not bubble and thus did not fall.

    In Poland, lacking a robust Zloty mortgage infrastructure, liberal Yen loans were offered to prime the housing market.

    More generous terms have always been available by FHA or the VA, but other terms applied such as the seller paying the points, so that durring the bubble sellers would not sell as a non-FHA or non-VA buyer was always available.

    This total disregard to sound lending occurred in the U.S., Spain, Ireland, the U.K., eastern Europe, etc.

    This housing bust is global and the latest news is that property prices in Mumbai, India are falling.

    A house is only an investment if you buy it to rent it with the expectation that the rent covers ALL costs.

  11. This is exactly what happened in the mid 1980’s as the MI’s realized (late) that markets were entering a downwards spiral. Some survived (MGIC filed Chap 11) and some did not. Those who did not, like Verex, continued originating in declining markets (like Texas) and were unable to recapitalize. Mr. Mortgage has it wrong. These are private companies with obligations to their shareholders and should not be taking undue risk to try and salvage inflated markets. If history repeats, this is a sign that the worst declines are yet ahead.

  12. […] which happens to be just about every populated area in the nation. I wrote about it on August 4th (click here for story). If Radian experiences further trouble they may scale back to 90% as well on new business.  This […]

  13. […] This is a follow-up on my story on August 4th entitled, ‘MGIC Reduces Mortgage Insurance LTV’s in CA, NV, AZ and FL…The Leaves Two‘. […]

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