Losses are up and profits down at the nation’s largest private mortgage insurer, Mortgage Guaranty Insurance Corp.
MGIC - which insures 1.3 million mortgages valued at $176.5 billion - said today that fourth-quarter earnings were down largely because the slowdown in the housing market cut into the generation of new premiums.
But the company is also facing a rise in the percentage of delinquent A-minus and bad credit home loans it insures, disclosing that regulators in New York and Minnesota have investigated its captive reinsurance practices.
Parent company MGIC Investment Corp. reported fourth-quarter earnings dropped 5 percent to $121.5 million, or $1.47 per share, compared to the same quarter last year. At $564.7 million, earnings for the year are down 9.9 percent from 2005.
Premiums written during the quarter totaled $305.6 million, down 3.5 percent from the same time last year, the company said. The $1.22 billion in mortgage insurance premiums written for the year was 2.8 percent less than 2005’s.
At the same time, fourth-quarter losses were up 9 percent from last year, to $187.3 million. Losses for the year were $613.6 million, an 11 percent increase from 2005. While the percentage of all loans insured by MGIC that were delinquent declined from last year, the percentage of delinquent bulk, A-minus and bad credit mortgages is on the upswing.
The percentage of all loans insured by MGIC delinquent at the end of 2006 stood at 6.13 percent, compared with 6.58 percent at the same time last year, and 6.05 percent at the end of 2004.
The percentage of bulk loans delinquent at the end of the year was 14.87 percent, up from 14.72 percent in 2005 and 14.06 percent at the end of 2004. Bulk loans are part of a negotiated transaction between the home loan lender and the mortgage insurer.
About 85.6 percent of the loans MGIC insures are prime, with 10 percent classified as A-minus and 4.2 percent as subprime/bad credit. That compares with 84.3 percent prime, 10.9 percent A-minus and 4.8 percent subprime in 2005.The company said 8 percent of loans insured on an individual, or flow, basis are adjustable-rate mortgages, while 65 percent insured bulk loans are ARMs.
MGIC “believes the volume of interest-only loans (which may also be ARMs) and loans with negative-amortization features, such as pay-option ARMs, increased in 2005 and 2006.”
Although the company has no data on the historical performance of such loans, it “believes claim rates on certain of these loans will be substantially higher than on loans without scheduled payment increases that are made to borrowers of comparable credit quality.”
Today’s Lakeland Ledger contains an article detailing the new tax break for mortgage insurance - and whether it makes sense for homeowners. The results may surprise you.
When she heard about a new tax break for mortgage insurance, Kathryn Considine, who paid $55 a month for it last year, was delighted.
“I thought if I could deduct what I paid this past year, that would be great,” she said.
But she actually won’t get the tax deduction - and neither will anyone - unless the premiums you’re paying are for a home mortgage loan you take out this year.
Even if you qualify, the deduction is good for only one year.
The mortgage insurance deduction, part of the last-minute tax bill Congress passed in December, turns out to be yet another example of tax policy gone wrong.
Here’s a little background:
To reduce their risk of losing money, a mortgage lender usually requires mortgage insurance if you put down less than 20 percent of the purchase price of a home. It pays off if you default.
The drawback: The premiums increase your mortgage payment, typically by $50-100 a month. However, many buyers get around this requirement with a piggyback mortgage deal - an 80 percent first mortgage paired with a 20 percent home equity loan or credit line at a higher interest rate.
This pairing became very popular when short-term home loan rates were low, causing a drop-off in business for mortgage insurance companies.
The industry’s solution was to lobby Congress to make premiums deductible, calling for a more level playing field. Many groups interested in making affordable housing more plentiful supported the effort.
“We are pleased that policymakers have recognized mortgage insurance as a cost of finance just like mortgage interest,” Suzanne Hutchinson, executive vice president of the trade group Mortgage Insurance Companies of America, said.
The association says as many as 2 million families will be buy or refinance an insured mortgage loan next year and be eligible for the tax break. Their incomes must be less than $110,000 a year. No home loan refinancing can be for more than the original loan on the home.
Unfortunately, this new deduction flunks a basic fairness test:
- Why should 2 million families who take out new mortgages get a tax break while millions of others paying mortgage insurance premiums do not?
- And why should mortgage insurance get better tax treatment than property insurance, which also is required by a mortgage company and is much more costly?
The arrangement also flunks a common-sense test:
- No deduction should be added to the tax code for just one year, especially one that is complicated to apply and save people anything significant on their home mortgages.
So why did we end up with what we did? An unfair bill that expires after one year costs a lot less than one that’s more comprehensive and becomes a permanent part of the tax code.
As it is written, the cost to the government is just $91 million in lost tax revenue. But of course that’s a misleading number because the next lobbying effort will be to extend it.
“It was a good way to get the deduction on the books without having to get into how this will impact the federal budget beyond one year,” association spokesman Jeff Lubar said.
At least he’s honest.
Mortgage insurance will be tax-deductible in 2007, and for some homeowners, the new law means it will be cheaper to get mortgage insurance than to get piggyback mortgages.
Hundreds of thousands of homeowners will save a total of $91 million when they file their tax returns in 2008, according to estimates prepared by the mortgage insurance industry.
The bottom line for consumers, according to Holden Lewis of Bankrate.com: Don’t get a piggyback mortgage without taking a serious look at mortgage insurance, because mortgage insurance is likely to be cheaper in the long run, and it might even cost less in the short run.
Here’s a look at how a piggyback loan and mortgage insurance match up:
According to experts, a homeowner with a $180,000 mortgage would save about $351 in taxes per year because of the mortgage insurance law that was just passed. This assumes the borrower has a good credit score and is in the 25 percent tax bracket.
When you buy a house, a mortgage lender considers you a risk if you make a down payment of less than 20 percent. There are two main ways to make you pay for that risk: mortgage insurance and piggyback loans.
Mortgage insurance is the old-school method. You, the borrower, pay for the policy, but the lender is the beneficiary. If you fall behind on the loan payments and the mortgage company has to foreclose, the mortgage insurance policy reimburses the lender for legal costs and lost income.
The premiums depend on the size of the home loan, the percentage of the down payment, your credit score and the type of mortgage insurance you get.
When you use a piggyback mortgage, you get two home loans: a primary loan for 80 percent of the house’s value and a second mortgage for the rest of the money you need. With a 5 percent down payment, you would get what’s called an 80-15-5 mortgage: an 80 percent loan, a 15 percent piggyback and 5 percent down.
In turn, getting a piggyback loan effectively eliminates the need for mortgage insurance. The piggyback can either take the form of a fixed-rate home equity loan or a variable-rate home equity line of credit. The piggyback has a higher rate than the first mortgage.
The combined payments on a piggyback mortgage are a bit less than the payment on a single loan with monthly mortgage insurance premiums. For years, piggybacks had a big advantage because the mortgage interest on both mortgage loans was tax-deductible; mortgage insurance payments were not.
Now that has changed, with these caveats. The tax deduction applies only to home mortgages that are closed in 2007. If you currently have a home mortgage loan with mortgage insurance in 2006, you won’t be able to deduct the premiums in the 2007 tax year unless you refinance in 2007.
There are income limits. You get the full deduction if your adjusted gross income is $100,000 or less. The amount you can deduct phases out rapidly after that, and no mortgage insurance deduction is available if you make more than $110,000.
This is a one-year deal, and Congress would have to renew the deduction to make it apply for the 2008 tax year and beyond. Of course, if you opt to take the standard deduction instead of itemizing deductions, the new mortgage insurance tax credit makes no difference to you.
When you put those complications aside, the new law makes it easier to compare loan offers. Everything is now on equal footing. Mortgage insurance is tax-deductible and piggyback mortgages are tax-deductible.
Robert J. Bruss, a lawyer and real estate broker, answers reader questions about housing related matters in a syndicated column. Here’s his latest Q & A session, in which he talks about mortgage insurance, the role of real estate lawyers, and the complexities of dual ownership:
Q: I recently heard a financial adviser suggest that a home buyer can pay up front for mortgage insurance premiums by paying 1 percent of each $100,000 of the mortgage. This adviser says that while this is possible, most mortgage lenders don’t explain it. Is this true?
A: Yes, PMI premiums can be prepaid, but why in the world would you want to do that unless you receive a huge discount?
It makes no sense to prepay PMI, especially since PMI fees are not tax deductible (although Congress is actually making them tax deductible next year, the same as mortgage interest).
Another reason not to prepay PMI is you might sell the property and pay off the PMI mortgage, or you could pay down the mortgage loan balance to get PMI premiums removed.
Q: Two years ago my partner and I bought a condo together. I paid the full down payment and we have evenly split the mortgage payments, condo fees and property taxes since then.
However, he recently moved out and says he wants his half of the home equity (around $45,000). I don’t have that kind of money to buy him out, and can’t pay the expenses on my own. Can he force the sale of our condo?
A: If both names are on the title, the answer is yes. Your ex-partner can bring a partition lawsuit to force the sale of the condo with a split of the sales proceeds. However, if his name is not on the title, he can’t bring a lawsuit.
You will need to hire a real estate attorney if he sues for partition. Because you paid the down payment, your attorney will make certain you receive that amount before sales proceeds are divided.
A partition sale is a possibility whenever two or more individuals take title to real estate together. For this reason, it is wise to consider other forms of co-ownership, such as a partnership agreement, which prohibits a partition lawsuit.
Q: Last year my mom quit-claimed her house title to herself and me. She recently lost her job and I started paying her mortgage. After my name was added to her title, I got married. My wife and I now pay the mortgage. Can I add my wife’s name to the title so title will be held by my mom, my wife and me?
A: If your name is already on the title to the house, you can then deduct the mortgage interest and property taxes you pay on that property.
Why complicate things by adding your wife to the title? In some states, such as California, that could cause a property tax reassessment.
I don’t see any advantage - only several disadvantages - of adding your wife’s name to the title. The mortgage interest and property taxes you pay will still be deductible on your joint tax return because you are legally obligated to make those home loan payments.
Legislation that Congress passed over the weekend contains a provision that would result in tax savings for many first-time home buyers next year.
The provision nestled in the federal “Tax Relief and Health Care Act of 2006″ would allow home buyers to deduct the cost of mortgage insurance premiums they pay in connection with a mortgage obtained in 2007.
It was one of scores of tax breaks appended to a tax bill approved by a wide margin by the House on Friday and the Senate Saturday morning just before Congress wrapped up the lame-duck session. The bill would cost $38 billion over five years, the San Jose Mercury-News reports.
The bill, which is expected to be signed into law soon, extends a raft of popular tax breaks that had expired, including a $4,000 deduction for higher education tuition, a $250 write-off for teachers who buy classroom supplies, incentives to buy energy efficient cars and home improvements, and more.
The mortgage insurance tax break would mark a big change for homeowners.
Currently, owners can deduct the interest they pay on their mortgage loans but not the cost of mortgage insurance premiums. Supporters of this new legislation say the new law would help level the playing field for low- and moderate-income buyers, who are the most likely to need mortgage insurance.
Traditionally, lenders have required that home buyers pay for private mortgage insurance if they put up a down payment worth less than 20 percent of purchase price.
Mortgage insurance typically costs about half of 1 percent of the mortgage. On a $400,000 loan, for example, the annual cost would be about $2,000. The mortgage insurance protects the lender in case the borrower falls into delinquency and defaults on the loan.
In recent years, many home mortgage lenders have helped buyers avoid mortgage insurance premiums by arranging so-called piggyback mortgages.
As a result, a borrower who can make a 5 percent down payment might take out a first mortgage for 80 percent of the purchase price, and a second mortgage loan for the remaining 15 percent – in effect substituting the second mortgage for much of the traditional down payment.
One drawback to the piggyback mortgage strategy is that lenders typically charge sharply higher interest rates for the second mortgage loan.
Under the new law, home buyers whose adjusted gross income is $100,000 or less could write off all the premium costs. Buyers with income between $100,000 and $110,000 would get to deduct a portion of the costs.
U.S. companies planning to enter the expanding Canadian mortgage insurance market say they will make it easier for more Canadians to own homes. But they acknowledge criticism that new products could push vulnerable groups further into debt.
The lucrative mortgage insurance market is about to undergo a revolution north of the border. Last year, when there were only two government-backed providers, insurers covered a whopping $322 billion worth of mortgages. That’s one-third the size of the U.S. market, but enough to place Canada second in the world, according to the Toronto Star.
It’s the law in Canada that home buyers with a down payment of under 25 percent buy mortgage insurance. It covers the mortgage lender — such as a bank or credit union — if the home buyer ends up in default. By deferring some of the risk away from lenders, it allows them to offer mortgages to riskier groups, such as new immigrants or the self-employed.
For decades, Crown corporation Canada Mortgage and Housing Corp. had the market locked up. About a decade ago, Genworth Financial Canada came in as the first private rival. This spring, Canada announced in its budget that it planned to extend its guarantee for companies that insure mortgages.
“These changes will result in greater choice and innovation in private mortgage insurance, benefiting consumers and promoting home ownership,” the budget stated.
Around that time it became clear that U.S.-based AIG was preparing to enter the market. There are now at least three American firms wooing the big banks, credit unions and mortgage lender groups.
In recent months, rumours of new entrants alone have been enough to shake the market, said Mark Tonnesen, a former Royal Bank employee who is now chief executive of North Carolina-based Triad Guarantee Insurance, another firm planning to carve out a piece of the Canadian market.
“I think that the advent of the 40-year home loan, and now mortgages that are being allowed up to 100 percent of loaned value, are indications of the kind of support that Canadian consumers can get through increased competition on the mortgage insurance side,” he said.
But those innovations have also come under criticism for placing vulnerable Canadians further into debt and potentially raising the chance of a large number of foreclosure filings come the next big economic downturn. Tonnesen suggests it’s not the insurers’ responsibility.
“I don’t think that the private sector ought to do anything other than create choice, convenience and innovation, with the public interests in mind. The public interests meaning whether or not demand for such an innovation exists,” he said.
As for the larger picture?
“We look forward to working then with the government to make sure any public policy issues are addressed effectively, and I think that good and healthy tension between those two builds a strong Canada,” he said.
Stephen Smith, CEO of California-based PMI Group Inc., said “it really is the balance between giving people the opportunity to participate in home ownership … but not doing so in a way that increases foreclosure rates and really harms communities.”
Private mortgage insurance.
Many prospective applicants for home loans believe this is a bum deal. Not so, says MarketWatch — although it definitely has its pros and cons.
For almost a half century, private mortgage insurance, or PMI, has been a necessary evil for any prospective homeowner who is unable to accumulate the requisite 20 percent down payment on a home loan that makes lenders comfortable.
Studies show that borrowers who put up less than 20 percent of the purchase price are far more likely to default and go into foreclosure than those who have more of their own money riding on the deal. And lenders abide by that stat.
Enter PMI, which assumes part of the extra risk lenders take in making a mortgage with less than 20 percent down. If you should fail to make your payments and the lender is forced to foreclose, the company will cover part of the lender’s loss.
Of course, this doesn’t come without a cost. PMI can add up to a couple of hundred dollars a month to your house payment. And the insurance is in place to protect the mortgage lender, not you.
Still, thanks to mortgage insurance, which was invented in 1957, millions of folks — 1.5 million alone in the last 12 months — have become owners of houses, many with as little as 3 percent of the purchase price coming from their own funds.
There are alternatives. One is to wait until you accumulate enough cash for a 20 percent down payment. Another is attempt to secure a low down-payment loan insured by the Federal Housing Administration (FHA). And yet another is to seek a subprime lender who doesn’t require insurance.
The drawbacks? It could take years to scrape together enough cash to avoid PMI. An FHA mortgage is more expensive than those backed by private companies and subprime loans are even more costly than that.
Several years ago, people tried another strategy: Take out another mortgage to cover the difference between the amount of cash they had on hand for a down payment and 80 percent of the purchase price.
In simple terms, if the mortgage was for $100,000 and you had only $10,000, you would take a second lien for the difference, or $10,000.
In some cases, but especially when mortgage rates were so low, this maneuver, also known as “piggyback” or “combination” loans, was actually less expensive than PMI. But it, too, has shortcomings. And in some cases, it’s not the cheapest choice.
In some instances, combo loans may save borrowers money, but they also make the lenders who tout them make more money, too. According to one analysis, lenders prefer piggyback loans because they “earn additional revenue” on the second mortgage portion of the loan, which carries higher interest.
The most creditworthy borrower can sometimes secure the second lien, for perhaps “only” two percentage points more than what they pay on the first mortgage. But for anyone else, rates can be up to six points higher.
Another point to consider is that since these combo loans already include a second home mortgage, you are pretty much precluded from taking out a home equity loan or line of credit once you build up some value.
The piggybacked second lien of some combo loans, though, are in the form of a home equity line of credit, so you may be able to borrow more against your house as you repay the loan and you continue to build equity through appreciation. And, naturally, you can always scrap the entire thing by refinancing to get at your equity. But refinancing a combo loan could be a lot more complicated. And costly.
Another sticking point is that the second-lien portion of a piggyback loan is often adjustable, which means your payments could go up if mortgage rates increase. Furthermore, some piggyback loans are 15-year balloon mortgages with 30-year amortization schedules.
Therefore, at the end of the 15-year payback period, you could be left with a big payment, and you may be forced to refinance at a time when interest rates aren’t nearly as friendly.
Those are the negatives.
On the plus side, interest paid on a second mortgage is tax deductible. The money you pay for mortgage insurance can’t be written off, but Congress is considering a trial program that would make premiums on both private and government insurance a tax deduction for those earning under $100,000, at least for 2007.
Also, if you should sell or go through the home mortgage loan refinance process within the first 15 years of the loan, you’ll get a refund for the unused premium. The longer you’ve held the loan, the lower the refund. But if you give back the loan within, say, five years, you can expect a rebate of anywhere from 33-50 percent.
Finally, private mortgage insurance can be canceled once your equity has reached a certain level. Your lender may put you through the wringer before allowing you to drop coverage, and you’ll almost certainly have to pay $300 or so for a new appraisal. But the only way you can end the 10 percent 2nd mortgage is to pay it off.
Earlier in 2005, S.A. Ibrahim’s pitch that mortgage investors would benefit from insuring portfolios against a spike in borrower defaults fell on deaf ears.
Now his phone is ringing off the hook.
Ibrahim, CEO of the risk management and mortgage insurance company Radian Group Inc., predicted the housing slowdown that took hold last winter lead to greater losses on mortgages, or at least lift bets that eroding credit would hurt the value of related securities.
“Six months ago they weren’t ready for it,” Ibrahim said last week. “Now, we are starting to get some phone calls from customers that include lenders with home loan portfolios.”
Today, home price appreciation has ground to a halt, inventories stand at 13-year highs, and homeowners face rising payments. Even banks that cherry-picked the best home mortgage loans for investments now fret about portfolios losing value.
Delinquencies are rising more after edging higher in the first half of this year, according to the Mortgage Bankers Association. The delinquency rate for loans to the riskiest borrowers rose 1.37 percentage points to 11.7 percent in the second quarter from a year earlier, while the pace on prime mortgages edged up 0.09 point to 4.39 percent.
“There is a heightened sensitivity to credit risk among investors,” said Ibrahim. “A big disconnect between that and the behavior of credit spreads, which have been tight, may soon reverse.”
Other private mortgage insurance providers say they sense an uptick in business from underwriters seeking to enhance the loans they sell or securitize.
“The momentum is shifting” in favor of mortgage insurers, said Paul Miller, an analyst at investment bank Friedman Billings Ramsey Inc. in Arlington, Virginia. “The heydays of great credit are over and we are going back to a more normal state and giving insurers some pricing power.”
As bad credit mortgages become more pertinent within the lending industry, home mortgage insurance “in force” expanded for a 10th consecutive month in September to $645.4 billion, marking its largest year-over-year gain for 2006. Applications are on the rise since the summer.
The recent focus of bank regulators on mortgage underwriting standards has also intensified concerns over loan quality. The guidance, which aims to strengthen underwriting standards on riskier home loans, is turning banks to insurers as a way to satisfy regulators or make “cosmetic” improvements to their portfolios.
PMI Group Inc. executives have seen a pick-up in business from investors looking to enhance pools of loans that were not protected when first sold. That said, the response is short of a “wholesale panic” in mortgage credit, said David Katkov, President and Chief Operating Officer of PMI Mortgage Insurance Co. in Walnut Creek, California.
“People are being prudent risk managers… you don’t want to be caught in the bust,” he said.
Insurers, while benefiting from investor jitters, must negotiate the credit downturn themselves since rising defaults also mean more claims. While the amount of insurance on the books has risen due to widespread bad credit issues among U.S. consumers, investors are skeptical the companies will see benefit in their bottom lines.
As you set forth on the home purchase loan process, there are many factors to consider. Here’s some quick help with one of them:
Private mortgage insurance (PMI) is extra insurance a lender may require you to buy if you’re handing out less than 20% of a property’s value as a down payment. Why is this the case? Because people who put down small amounts are more likely to default on a loan.
If you opt for mortgage insurance, once you’ve got 20% equity in your home, you should be able to cancel the policy.
An important thing to understand about PMI is that the 20% equity threshold relates to your home’s value, NOT necessarily 20% of the mortgage amount. If you receive a great deal and buy your home below market value; buy a fixer-upper and fix it up to increase its value; or pick a locale that suddenly becomes popular and rapidly appreciates in value, your mortgage amount might be very different from the value of your house.
If you are required to pay for PMI, keep tabs on the changing value of your home. Consult with a home mortgage broker to learn a lot more.
Those in the market for a new home must consider something aside from the type of loan they plan on taking out: Private Mortgage Insurance (PMI).
Lenders require PMI on mortgages loans where borrowers are financing more than 80 percent of the price. Unlike other types of insurance, PMI is designed to protect the lender - what if the borrower defaults on a payment? - not the person paying the premiums.
As explained by Bankrate, there are two types of PMI: borrower-paid and lender-paid. Borrower-paid PMI is by far the most widely used, but PMI companies are encouraging the use of lender-paid as an alternative to piggyback loans, which are popular with borrowers.
Here’s a rundown of PMI options:
• Borrower-paid PMI. The loan premium is added to the mortgage payment, while the mortgage company transmits the PMI payment to the insuring company.
• Lender-paid PMI. The payments are wrapped into the overall loan rate so you don’t make a separate PMI payment. Instead, you pay a higher interest rate and the lender pays a portion of your overall payment to the insuring company. The advantage of this type of PMI is that you can deduct the mortgage interest from your taxes. PMI isn’t deductible.
• Piggyback loan. Named because a second mortgage is “piggybacked” onto the original mortgage loan, a piggyback mortgage is a second mortgage that closes simultaneously with the first. There are variations, but a popular product is the 80-10-10 loan, where the consumer takes out an 80 percent first mortgage (thus avoiding PMI) a 10 percent second mortgage and pays 10 percent as the down payment.
Speak with our brokers and experts and learn more today.
