Private Mortgage Insurance Rates Jump

I knew this was coming.

With holders of second mortgages not wanting to go above 90% Loan to Value Ratio, sellers of Private Mortgage Insurance, (PMI) have the "less than 10% equity" market all to themselves. The rates had gotten surprisingly low (less than 1% for 100% financing), but there are two factors that combined to make this boost happen:

1) With the risk of default rising, the actuaries at the insurance companies legitimately have increased costs to worry about. With equity being stagnant right now, the risk that mortgage insurance is going to have to pay a claim has risen dramatically in the last year or so. It is nothing except fiscal prudence to raise insurance rates when the probability and likely magnitude of a claim both increase as they have. Insurance companies are so strictly regulated as to reserves and margins and everything else that they probably had no other legal option. This explains some fraction of the increase.

2) "All The Traffic Will Bear" You don't think these companies are in the business of putting their money on the line for free, did you? Furthermore, not only is Private Mortgage Insurance a "wide moat" operation (a business that's hard to get into), you don't see any large number of companies who currently want to get into it. Profit margins are comparatively low, and there is, to their way of thinking, a significant risk the market could get even worse than this. With second mortgage holders no longer lending above 90% CLTV, PMI providers not only have the field to themselves, but they're in a very high demand situation. Increasing demand plus essentially constant supply equals higher prices.

Here's a sample of the rate boosts I was notified of today:

30 year fixed, credit score 620-659, 97- 100% LTV old rate 96 basis points (.96%) new rate 170 basis points.

15 and 20 in the same situation go from 85 to 163 basis points (although I can't remember the last time I saw a 15 year loan with PMI).

Given a 5.75 fixed rate mortgage without points today (rates will change by the time you're reading this), this substantially increases the effective interest rate, from about 6.7% to almost 7.5.

Payment on a $300,000 balance? Goes from roughly $1990 (principal and interest plus PMI) to approximately $2175. That $185 makes a difference of about $415 in the minimum monthly income to qualify for the same loan, in the case of 100% financing. People who may have been able to qualify last week could be rejected in the future. Rates would have to drop by about a full percent to offset this, and between you, me, and however many thousands of other people read this, I don't think that's going to happen. Fed cutting the overnight rates or not, the macroeconomic market pressures are all upwards. Matter of fact, even with the new cut the Fed made yesterday, rates today are higher than they were just a few days ago.

For those whose loans are already funded with PMI, don't lie awake nights wondering when they're going to hit you for more money. The rates on existing loans is already under contract, and they're not able to raise the rates on PMI, as the terms are specified in your loan note - a legal contract. The lender can't alter any of the other terms, either - why should they be able to suddenly boost PMI? It's only for loans that have yet to be funded that the rate increase applies.

For those looking to sell real estate, this puts current owners who are willing and able to "carry back" part of the purchase price into an even stronger position, negotiations-wise. If the prospective buyers can pay you more money for your property or not buy anything, some will pay more money. It's still a situation to be just as careful about as ever, but every bit of leverage helps in negotiations.

As I've said in the past, having a down payment for real estate is not mandatory, but is an excellent idea. That same $300,000 loan at 5.75% only has a payment of $1751 if you've got 20% equity. PMI hits every first trust deed above 80% of the value of the property. Period. It's in the federal banking regulations. Some lenders will hide it in the note rate, but you're still paying it if you're in this situation. Good Credit, excellent credit, perfect credit - the only difference it might make is the exact cost, not whether or not you're paying it. Wouldn't you really rather make the lower payment? The extra money you pay for PMI doesn't do anything towards paying your principal down, either. If you didn't have to pay it, you could invest that money, use it to pay down your principal faster, or just have a good time. You'd be done in 227 months if you made a payment of $2175 on a $300,000 loan at 5.75% - less than 19 years, instead of 30.

If you're looking for a new loan, whether purchase or refinance, don't waste your time calling around trying to find one lender who'll let you slide without PMI. It will be there if the situation requires it - any first trust deed over eighty percent of the value of the property. It can be priced into the loan or broken out as a separate charge, but it will be there when the loan funds. However, there is no requirement to disclose PMI at sign up, or to disclose that a certain amount of what you're paying is PMI, and many loan originators are quite deft at hiding it or deflecting questions about it. Which is likely to be the better loan in the final analysis: The one who hides the real cost of the loan and its nature, or the one who tells you the whole truth in the first place?

Caveat Emptor