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