Private mortgage insurance (PMI) is typically required for homeowners who have less than 20 percent equity in their property. But PMI providers are suffering huge losses, and that may translate into higher costs for consumers-even if they don't actually need coverage.

Even if your home equity is so high that you don't need private mortgage insurance, the troubles faced by PMI companies may still cost you money. If you're buying a home, you may need to buy PMI, a specialized insurance for those making a down payment of less that 20 percent of the home's value. In the event that you default, the PMI coverage pays a claim to the lender or investor to help minimize the adverse impact and cover a portion of their loss. Most homeowners pay between $50 and $150 a month in PMI payments, based on the original price of their home.

Trouble in PMI city

These days, the unique companies that provide PMI insurance are faced with massive losses because of an unprecedented number of defaults. Paying mounting numbers of claims to compensate for low amounts of home equity is taking a serious toll on them, and many are now threatened with bankruptcy.

If they go broke, they won't be able to pay PMI insurance claims to lenders, or to the biggest beneficiaries of PMI claims, Fannie Mae, the agency that guarantees loans before selling them to investors. When homeowners fail to repay those mortgages, Fannie Mae falls back on PMI insurance to help make up the difference. But industry analysts point out that some of the biggest PMI companies are already behind on payments of claims to insured clients like Fannie Mae. Without that insurance money, Fannie Mae-and other mortgage companies-face mounting financial pressure. When these businesses feel the heat, they normally pass it along-like a hot potato-to consumers. Trouble in the PMI business spells more trouble and more expensive borrowing costs for the average American.

Fannie Mae in the middle

Fannie Mae could dump their insurance providers and take their business elsewhere. On the surface, that sounds like a good idea. But withdrawing their business will have a huge negative impact on the PMI companies. Fannie Mae accounts for as much as 70 percent of the revenue for some of these businesses. If that support disappears, the insurers will likely plunge into bankruptcy. If they go under, Fannie Mae stands to lose billions in outstanding payments that the insurance companies owe them. Both options carry unwanted and potentially dire consequences.

The reason all this matters to ordinary homeowners is that Fannie Mae and its peers are already starting to feel overexposed to risk. They have too little home equity in their portfolios, and less chance of getting paid for their PMI claims. With mortgage insurance no longer reliable to fill the home equity gap, lenders may soon be forced to make up the difference by demanding larger down payments from homebuyers.

Published on April 4, 2015