Companies offering private mortgage insurance (PMI) are suffering catastrophic losses due to an avalanche of foreclosure-related claims. But the FHA, which offers HUD-backed FHA loan guarantee reassurance to banks and investors, is quickly capturing that lost PMI market share.

Private mortgage insurance (PMI) companies are facing huge losses, and some are on the verge of financial collapse. The reason is that they insured loans on homes with small down payments and low equity that are now in foreclosure. The situation is so dire that one major company has been forced to stop writing new policies, and Fannie Mae stands to lose billions if its main PMI vendors go out of business without first paying their claims.

Housing bill and PMI

Despite extraordinary efforts, like the passage of the new housing bill, applications for traditional loans backed by PMI have fallen significantly. Some point to the fact that lenders are tightening their standards. Buyers are having trouble paying larger down payments, closing costs, and miscellaneous fees. Meanwhile, Federal Housing Administration (FHA) loan guarantees help to offset some of the expense of buying a home, and for that reason, FHA loans are enjoying a big resurgence in popularity-even rapidly gaining an unexpectedly large share of the mortgage market. A year ago, the FHA controlled 4 percent of the PMI market with less than 300,000 loan guarantees; but now, FHA loan guarantees account for more than 800,000 transactions per year, or about 15 percent of this market.

FHA insurance low-cost mortgages

In the past, most of those who gravitated toward FHA loans were first-time buyers and people with lower levels of income and fewer assets. They needed affordability and, since FHA insurance offers loan guarantees that protect lenders from losses in the event of default, they found HUD-backed FHA mortgage products appropriate and attractive. But those in higher income brackets relied primarily on conventional loans backed by PMI. They could get those loans at cheap interest rates, and even roll the down payment into the loan for 100 percent financing. As a result, they shunned FHA mortgages and the extra documentation and underwriting that's typically required when applying for any mortgage that comes with FHA loan guarantees. Nowadays, however, borrowers in every tax bracket are heading to the FHA to take advantage of low cost mortgage products.

FHA loan guarantee premiums have increased as the agency attempts to control expenses in today's treacherous market. The increases amount to about 25 basis points. That converts to 1.75 percent of the total loan amount, or about $500 for a typical $200,000 mortgage. But that rather nominal fee is a small price to pay for saving one's home, and the FHA expects to refinance loans for half a million homeowners by the end of 2008. Under the Hope for Homeowners program in the new housing bill, for example, the FHA is authorized to invest $300 billion in mortgage loans.

Published on October 4, 2008