RealEstateEconomyWatch.com

Even as overall home sales soured over the past six months, home buyers and lenders are turning to private mortgage insurance (PMI) at a record rate to get into homes with a lower down payment and reduce their exposure to risk.

Since July, when home sales tanked following the expiration of the homebuyer tax credit, the value of traditional mortgage insurance coverage written per month has increased 29 percent, bulk policy coverage is up 242 percent per month and new pool risk insurance coverage written per month is up 191 percent, according to November data issued by the Mortgage Insurance Companies of America (MICA).

The boom in PMI coverage illustrates both the growing number of buyers who want to take advantage of lower rates and declining prices but lack the cash for a 20 percent down payment as well as the increasing number of lenders who are turning to mortgage insurance to reduce their exposure to retained risk associated with mortgages that have been originated or to prepare pools of mortgages for securitization.

“All other things being equal, the risk of loss from a mortgage loan is higher when the borrower makes a smaller down payment. Private mortgage insurance (PMI) enables lenders, loan purchasers, and investors to mitigate default risk on low-down-payment residential mortgages by transferring a portion of this risk to third-party PMIs, which specialize in managing this risk over the long term,” stated a report released yesterday Promontory Financial Group.

The dramatic and steady increase in business over the past six months signals improving conditions for mortgage insurers.  While PMIs avoided many of the worst-performing loans during the credit bubble, they nevertheless gained considerable exposure to mortgage risk and have suffered serious losses. The hardest-hit insurer, Triad Guaranty Insurance Corp., has written no new business since July 2008. The other six private mortgage insurers have been operating at a loss since 2007, according the Promontory report.”In short, while one relatively small insurer might or might not be actuarially insolvent, the conditions of the remaining firms are viewed by some experts as reasonably stable, if still uncertain, with significant variance by company. The current housing downturn will provide a rare andvaluable benchmark for assessing the adequacy of PMIs’ reserves and other risk management practices in the future,” concluded the Promontory report, which was commissioned by Genworth Financial, a leading mortgage insurer.

Two recent developments are making mortgage insurance more attractive to buyers. 

Under federal law, individual mortgage insurance policies automatically terminate when the borrower acquires an equity stake in the property greater or equal to 22 percent of its original sale price or original appraised value.  A recent regulation allows the borrower to cancel insurance when this ratio reaches 20 percent. For mortgages with an original loan-to-value ratio closer to 80 percent, this may occur after only a few years (depending on interest rate).

Secondly, private mortgage insurance premiums paid by borrowers were made tax deductible in 2007.  Late last year, Congress extended the PMI deduction to cover 2010 tax returns.