Archive for August, 2007
August 31, 2007 at 8:03 am · Filed under mortgage
As noted earlier, the essential feature of mortgage insurance is that it allows homebuyers to acquire a house with a small down payment. Usually, home-buyers who can afford only a small down payment also have low or moderate incomes; in this sense, mortgage insurance promotes home ownership for such households.
Over the past several years, PMI companies have introduced new programs targeted at low-and moderate-income households.(24) Often these programs involve other parties, including Fannie Mae and Freddie Mac and state housing finance authorities. Working with secondary market agencies through programs such as Fannie Mae’s Community Home Buyers and Freddie Mac’s Affordable Gold, the PMI companies expand their regular 95 percent loan-to-value ratio programs by allowing the borrower to use gifts and other nonborrower sources of funds as part of the down payment. These programs also use more flexible underwriting criteria. To offset the additional potential risk anticipated from such loans, borrowers are required to complete a homebuyer education course. Often the prepurchase counseling for homebuyers is undertaken with community groups and other nonprofit organizations.
State housing authorities generally issue taxexempt bonds to fund mortgages with high loan-to-value ratios granted to first-time homebuyers. PMI companies issue a special form of mortgage insurance (”pool insurance”) to enhance the credit quality of these bonds.
Another recent PMI industry initiative provides insurance for mortgages with 97 percent loan-to-value ratios. As with the programs described above, financial counseling is typically a mandatory component of these products. In addition, PMI companies use early intervention techniques in these programs for households that fall behind in their mortgage payments. Mortgages generated through these programs may be held in portfolio by the lender, whereas others may be sold into the secondary market.
Finally, the industry is examining and modifying its traditional products to make them more attractive to all households, including low- and moderate-income households. For example, PMI companies have recently introduced monthly payment programs that allow the borrower to pay the initial premium over time rather than as a lump-sum advance payment. This type of initiative lowers the amount of funds the borrower needs at closing to acquire a house and thereby allows households with fewer assets to become homeowners.
A calculation of the expenses incurred by a 1993 borrower purchasing a $100,000 home with the minimum required down payment (table 3) shows that the cash required at closing would be substantially greater for a mortgage with PMI ($8,250) than for one with FHA insurance ($,615).(15) The lower cash outlays associated with the FHA-insured mortgage mainly reflect the FHA’s willingness to allow the borrower to finance the closing costs and the FHA insurance premium. As described in the example below, an FHA-insured mortgage will be more attractive to households with fewer assets.
3. Generalized comparison of mortgage financing under FHA insurance and
private mortgage insurance for a typical mortgage on a $100,000 house Dollars except as noted
Item FHA PMI
Sales price of home 100,000 100,000
PLUS: Closing costs financed(1) 2,300 0
EQUALS: Acquisition cost 102,300 100,000
LESS: Minimum down payment(2) 4,615 5,000
EQUALS: Maximum mortgage amount
(before initial mortgage insurance
premium) 97,685 95,000
PLUS: Initial mortgage insurance
premium financed(3) 2,931 0
EQUALS: Total financed 100,616 95,000
Loan-to-value ratio (percent)(4)
FHA calculation 95.5 ...
Actual 100.6 95
Cash required at closing
Closing costs 0 2,300
Down payment 4,615 5,000
PMI(5) ... 950
Total 4,615 8,250
Total monthly payment(6)
Years 1-10 778.97 735.87
Years 11-30 778.97 716.87
NOTE. … Not applicable.
(1.)Assumed to be 2.3 percent of selling price, determined by calculating the ratio of the average closing costs to the average sales price of homes purchased in 1993 under the FHA section 203(b) home loan program.
(2.)Minimum FHA down payment equals 3 percent of the first $25,000 plus 5 percent of the remaining amount financed, excluding the initial mortgage insurance premium. Minimum down payment for PMI is 5 percent of the sales price.
(3.)Initial mortgage insurance premium is 3 percent of the maximum mortgage amount.
(4.)FHA loan-to-value is the maximum mortgage amount divided by the acquisition cost. Actual loan-to-value is the total amount financed divided by the sales price.
(5.)Initial premium of 1 percent of the maximum mortgage amount.
(6.)The mortgage in both the FHA and PMI cases is assumed to be for thirty years at 8 percent. The monthly payment is the sum of the loan payment (principal and interest) plus the monthly insurance premium, which under FHA is 0.5 percent (annual rate) of the maximum mortgage amount. The premium charged for PMI typically declines after a specified period; here it is assumed to be 0.49 percent (annual rate) of the maximum mortgage amount for the first ten years, and 0.25 percent (annual rate) thereafter.
(1.)For a comprehensive history of the PMI industry, see Charles Rapkin and others, The Private Insurance of Home Mortgages: A Study of Mortgage Guaranty Insurance Corporation, Institute for Environmental Studies (University of Pennsylvania, 1967).
(2.)During the period preceding the Depression, the industry developed a business similar to the current one for mortgagebacked securities. The companies offered “participations,” which involved the issuance of certificates to a group of investors who were entitled to receive periodic payments based on the interest income and principal repayments generated by the underlying mortgages. However, one significant difference between current and former market practices was that issuers of participations retained the right to substitute mortgages underlying a specific certificate so long as the substitute had the same face value as that of the original loan. The abuse of this right contributed to investor losses during the Depression.
(3.)Establishment of the Mutual Mortgage Insurance Fund was authorized by section 202 of title II of the 1934 National Housing Act. As the purposes of the act have expanded over the years, the FHA has added new insurance programs to its portfolio.
(4.)The Veterans Administration became the cabinet-level Department of Veterans Affairs (VA) on March 15, 1989. Technically, the VA offers loan guarantees rather than mortgage insurance, but the two forms of assurance are similar in function and both are referred to here as mortgage insurance. Other government agencies also provide home loan insurance but on a much smaller scale.
(5.)The tighter underwriting practices of recent years have helped reduce the proportion of insured loans with loan-to-value ratios of greater than 90 percent, from 47.6 percent in 1985 to 32.4 percent in 1993. The share of other higher-risk loans, such as mortgages secured by condominiums and non-owner-occupied properties and mortgages that allow negative amortization, has also declined. See David M. Graifman, “Mortgage Insurance: The Party Continues,” Standard and Poor’s Structured Finance (May 1994), pp. 13-17.
(6.)A few other PMI firms exist, but they do not currently write new mortgage insurance. For additional information about the PMI industry, see Mortgage Insurance Companies of America Factbook & Directory of Membership (Washington: Mortgage Insurance Companies of America, 1994).
(7.)Amerin Guaranty Corporation is new to the PMI industry.
(8.)Some lenders will grant low-down-payment mortgages without insurance. Most often such mortgages are extended as part of an affordable housing program, although lenders may choose to self-insure other low-down-payment mortgages as well.
(9.)Research has consistently found that mortgages with higher loan-to-value ratios default more frequently than those with lower ratios. See Roberto G. Quercia and Michael A. Stegman, “Residential Mortgage Default: A Review of the Literature,” Journal of Housing Research, vol. 3 (1992), pp. 341-79.
(10.)In recent years, the ninety-day delinquency rate for adjustable rate mortgages purchased by Fannie Mae has been roughly 50 percent to 100 percent higher than the delinquency rate on fixed rate mortgages. See John M. Dickie, “Residential Delinquencies and Foreclosures: First Quarter 1994″ (memorandum, U.S. Department of Housing and Urban Development, July 14, 1994).
(11.)For further information about the risk diversification and monitoring practices of PMI companies, see Roger Blood, “Managing Insured Mortgage Risk,” in Jess Lederman, ed., The Secondary Mortgage Market: Strategies for Surviving and Thriving in Today’s Challenging Markets, rev. ed (Probus, 1992).
(12.)The VA mortgage guarantee program is open only to veterans. It is usually the first choice of eligible households that can afford only a small down payment.
(13.)Recently, PMI companies have allowed part or all of the initial fees for insurance to be paid monthly.
(14.)However, the FHA discontinues the annual premium after a specified number of years for mortgages with loan-to-value ratios of less than 95 percent. For example, for FHA mortgages originated in 1993 that had a loan-to-value ratio of less than 90 percent, the FHA will discontinue the annual premium after seven years.
(15.)In 1994 the FHA lowered its initial premium from 3 percent of the mortgage to 2.25 percent.
(16.)The wealth advantage of the FHA borrower during the first year (shown in row 1 of table 4) reflects the lower cost of FHA insurance if the borrower holds the FHA-insured mortgage for only one year. This lower cost is a consequence of the FHA insurance refund policy. However, if to acquire the refund the FHA borrower incurs closing costs when taking out a conventional mortgage, the refund advantage may be lost.
In addition, the conditions placed on the PMI borrower’s ability to drop the PMI insurance affect this cost advantage. Some lenders allow borrowers to drop PMI with minimal charges once sufficient equity has accumulated in the property; other lenders do not allow PMI to be dropped, forcing the PMI borrower to refinance in order to drop the insurance. If the PMI borrower must refinance, then the relative advantage of the FHA refund is maintained. Furthermore, PMI companies may refund part of the initial premiums if a mortgage is terminated within the first year.
(17.)The maximum mortgage limit of $151,725 became effective March 15, 1993. The FHA also establishes higher limits for properties with two, three, or four units and for properties in Alaska and Hawaii. For instance, in 1993 the single-family limit in Honolulu was $227,550. See 58 Fed. Reg. 13950, March 15, 1993.
(18.)When this article was written, the data described were still subject to revision. Final data, which are available to the public, may differ somewhat from the data used here.
(19.)That is, in the case of depository institutions, the HMDA rule for reporting property location is based on office location, whereas mortgage companies are deemed to have an office in an MSA if they receive applications for, or purchase, five or more loans in a given year on property in that MSA.
(20.)About 23 percent of the PMI application records submitted to the FFIEC lacked data on race or ethnic origin. This proportion is much larger than that for HMDA records and reflects, according to industry representatives, the initial complications of starting a new data collection process.
(21.)FHA Trends of Home Mortgage Characteristics: Section 203(b) Mortgages Insured, U.S.A., Calendar Year 1993, FHA Comptroller, Information Systems Division (Department of Housing and Urban Development, n.d.).
(22.)The approval rate for one PMI company, Amerin Guaranty Corporation, is 100 percent because the firm delegates the decision to approve an application for insurance to the lending institution. Thus, Amerin is notified about applications for insurance only when a lender has selected them as the insurance provider.
(23.)If multiple applications are removed from the sample, denial rates for all racial groups are lower: 17.9 percent for Asian applicants, 19.4 percent for black applicants, 22.2 percent for Hispanic applicants, and 10.3 percent for white applicants.
(24.)PMI companies, like many government programs, do not use uniform definitions for low- or moderate-income households.
(25.)The Community Affairs staffs of the Federal Reserve Banks indicate that lenders generally are aware of the affordable housing initiatives of only the largest two or three PMI companies.
COPYRIGHT 1994 Board of Governors of the Federal Reserve System
COPYRIGHT 2004 Gale Group
August 25, 2007 at 5:13 am · Filed under mortgage
Federal regulators from the FSLIC (Federal Savings & Loan Insurance Corporation) have discovered that consumers are overpaying on their adjustable rate mortgages by more than $8 billion as a result of interest rate miscalculations. Between 50 and 60 percent of all adjustable rate mortgages contain some sort of error in the way interest is charged, their study shows.
Banks make two extremely serious mistakes in handling ARMs. One is failing to make proper initial disclosures on ARMs that feature discounted “teaser” rates. The second is some banks - reportedly a great many - are not making correct rate adjustments on outstanding ARMs.
The potential magnitude of both problems is daunting. With respect to inaccurate initial disclosures, there have been instances in the past several years of banks being required to reimburse customers hundreds of thousands of dollars for errors that arose out of innocent but careless mistakes.
Payment Adjustments
The other potentially huge error that banks make is failing to adjust the payment properly on outstanding ARMs.
This issue hit the front pages of newspapers last year when a former FSLIC employee conducted a study which found errors in 50 percent of the ARMs it examined. He charged that lenders are requiring payments at rate adjustment time that exceed the amount called for by the initial disclosures and/or contracts.
Among the most common potential sources of trouble are ambiguous contract language, inadequate computer programs, incorrect completion of documents, and calculation errors. In the last category, the mistakes include everything from clerical errors in data entry to carelessness in entering index values or rounding of results. For example, sometimes staffers uses the wrong date in selecting the index value or use the wrong index altogether. Index values change frequently, sometimes by the hour! This makes it difficult to calculate the interest charges. Sometimes adjustment amounts are not rounded off in conformance with the method in the initial documents. And that’s only the beginning!
The biggest problem for ARMs is the fact that loans are sold - oftentimes more than once - into the secondary market - to other banks, Fannie Mae and to investors. Overcharges develop as data is transferred between computer system.
Overcharges that are not corrected continue to compound monthly with each payment at the rate being charged on the note. To understand how quickly even small errors can skyrocket, on a $650,000 loan at 10 percent, the yearly rate would only have to be off 0.462 percent to result in an overcharge of $250 each month. If not corrected, the total overcharge in just 3 years would amount to $10,532.
Banks and mortgage companies are now rushing to comply with new accounting guidelines issued by the Federal National Mortgage Association for adjustable-rate mortgages. This comes four years after the disclosure of widespread overcharges by thrifts holding such mortgages. Many lenders since then have put audit programs into place. Inaccuracies, however, are said to persist.
It is important to understand that under truth is lending, lenders - with some exceptions - receive no leniency for errors because the institutions meant no harm. Nor is there leniency on the grounds that customers were given the correct information on some other form and understood the transaction.
Trust in lending is a technical regulation, and reimbursement penalties are imposed almost automatically for certain technical mistakes, regardless of cause or effect.
It is generally wise to correct understated APRs or finance charges that come to light by reimbursing the customer in accordance with agency guidelines. Unlike redisclosure or nonaction, reimbursement within 60 days of discovering the error will cure the violation and cut off further liability under truth in lending.
The Indianapolis Business Journal reported that Banc One Mortgage Corp., a division of Columbus, Ohio-based Banc One Corp., agreed to settle a class-action law suit charging that it miscalculated adjustable-rate mortgages. The case is one of more than a dozen filed against financial institutions throughout the U. S. by mortgagors who claim to have been overcharged on their adjustable-rate loans. To avoid a potential law suit - or, worse yet, a classaction suit - a bank should audit its loan portfolio.
Fannie Mae’s directive is aimed at reducing the number of faulty loans still circulating. The agency lists criteria that lenders must follow and details the results of adjustable-rate loan miscalculations and their effect on banks and consumers. The agency is requiring servicers to have in place systems and procedures to verify the accuracy of ARM adjustments.
ARMS Auditor
Audit firms are taking advantage of the new regulations to drum up business. Many assist businesses in reducing their monthly mortgage payments - and obtain refunds for any overcharges paid to the Lender. Typically they will advise the client of any errors - including those in Escrow Accounts (taxes and insurance) and charges for late payments - and provide the lender with all documents to recover any overcharges. If the mortgagor lacks any necessary papers, the ARMs auditor will normally obtain them from the lender. Since the index values on an ARM change frequently - sometimes by the hour - a thorough ARM audit requires specialized training and expertise.
The ARMs auditor typically will negotiate with the lender to obtain retroactive credit for any overcharges made to the mortgagor’s account over the life of the loan. Overbilling in the adjustable rate mortgage arena is real and oftentimes represents significant dollar amounts. For that reason, ARMs auditors often do not charge a fee for audit. If a refund/credit has been obtained, they will typically charge 50 percent of all recovered funds. This includes 50 percent of all overcharges on past payments.
Thus, if $150,000 were recovered from the bank, the mortgagor would receive $75,000 (half of $150,000).
The current noteholder is responsible for all overpayments, regardless of the number of times that the loan has changed hands. The mortgagor is not legally responsible for returning any money resulting from a bank’s error. Furthermore, since the audit typically is performed without charge on a contingency fee basis, the mortgagor has no downside risk. Upon completion of an audit, the mortgagors will either recover lost money or at least be satisfied in knowing that they have not been overcharged.
And here’s something to keep in mind: Even if the ARM already has been paid off, the mortgagor may still be able to recover overcharges.
Ian L. Renert is a partner at Hawthorne-Sterling & Co., a Stamford, Connecticut-based auditing firm that specializes in the recovery of overcharges involving ARMs, telephone, utilities, freight, commercial leases and workers compensation.
COPYRIGHT 1995 Hagedorn Publication
COPYRIGHT 2004 Gale Group
August 19, 2007 at 8:52 am · Filed under insurance
TORONTO - A coroner ’s jury ruled Jan. 16 that a patient’s death, which occurred more than two weeks after receiving an adjustment to her neck, was an accident. While the five-member jury investigating the death of Lana Dale Lewis was unable to find any direct evidence linking chiropractic adjustments to a stroke she suffered six days after being treated, the ruling of “accident” suggests that the manipulation performed by Etobicoke chiropractor Philip Emanuele on Ms. Lewis may have played a part in hastening her demise, and allows Ms. Lewis’s family to proceed with a civil suit against Dr. Emanuele.
Lana Lewis was admitted to Queensway General Hospital in Toronto on Sept. 1, 1996, six days after receiving an upper neck manipulation from Dr. Emanuele. Prior to suffering the stroke, she had seen Dr. Emanuele for approximately 18 months, primarily for treatment of migraine headaches and musculoskeletal pain. At Queensway, she was diagnosed as having suffered a minor stroke and was hospitalized briefly, then released. However, approximately 10 days after suffering the first stroke, she suffered a second, larger stroke that proved to be fatal. She was readmitted to Queensway, where she died Sept. 12. The initial coroner’s report did not cite the adjustment as the cause of death, and at that time, the Toronto coroner’s office decided not to hold an inquest into the cause of Ms. Lewis’ death.
Nevertheless, more than three years later, in November 1999, the Lewis family called for an inquest to determine the cause of her death. In January 2000, the family also filed a $ 12 million civil lawsuit against Dr. Emanuel and a number of chiropractic organizations, citing that they had not advised the public properly about the dangers of neck adjustments. Representing the Lewis family at the time was Murray Katz, MD, a longtime opponent of the chiropractic profession and founder of the National Association of Chiropractic Medicine (NACM). In early 2001, however, Dr. Katz was removed from the case after threatening to end the professional career of a Canadian coroner, Dr. Murray Naiberg.
After the family’s request for an inquest was denied twice, the coroner’s office reversed its stance and decided an inquest could proceed. Even then, however, it faced a series of delays. In addition to Dr. Katz’s removal from the case a second time, the Lewis family’s original lawyer excused himself from the proceedings, and several dozen slides of Ms. Lewis’ artery vanished, delaying the start of the inquest an additional six months.
The inquest into the cause of Ms. Lewis’ death finally began in April 2002. The coroner’s jury was charged not with assigning blame, but determining whether Dr. Emanuele’s adjustment played a role in the death, and was given the option of five possible findings: homicide, suicide, accident, natural causes, and undetermined.
The position of the chiropractic profession was that Ms. Lewis died of natural causes, exacerbated by her poor over all health - being overweight, a heavy smoker and drinker, and suffering from high blood pressure - all of which put her at increased risk for stroke At the trial, several medical experts testified that Ms. Lewis’ stroke was caused not by the chiropractic adjustment, but by advanced end-stage atherosclerosis that, in the words of Dr. Harker Rhodes, a neuropathologist at Dartmouth University Medical School, had “virtually completely destroyed” her left intracranial vertebral artery and blocked 70 percent of the right vertebral artery intracranially. Dr. Rhodes also stated “it was simply a coincidence” that Ms. Lewis received a neck adjustment a few days prior to her stroke.
Witnesses called by the coroner’s office and evidence presented at the inquest provided differing testimony. One letter, signed by dozens of neurologists, stated that blood vessels such as the vertebral artery can tear if a person’s neck is rotated improperly. Other witnesses testified that Dr. Emanuele’s adjustment was “the probable source of injury” to Ms. Lewis, and that there was only minimal to moderate atherosclerosis in her vertebral arteries.
In addition to ruling Ms. Lewis’ death an accident, the coroner’s jury made 17 recommendations, including:
* That the Ministry of Health work with the Canadian Chiropractic Association (CCA) and the Canadian Memorial Chiropractic College (CMCC) to provide funding for a study to assess the relationship between high-neck manipulation and stroke/injury and/or serious complications.
* That practitioners obtain written, informed consent from their patients prior to performing high neck manipulation, and that they provide patients with an information sheet outlining the possible risks associated with neck manipulation.
* That the Ontario Ministry of Health consider creating an internal database, into which chiropractors, medical doctors, hospitals, physiotherapists, the coroner’s office, and other health practitioners would report all cervical manipulations. A separate section of the database would document adverse events related to the manipulations.
* That a standard practice of recordkeeping be established, whereby chiropractors would report the type and specific location of any manipulation performed on a patient, along with the type of technique used to perform the manipulation.
* That after receiving a neck manipulation, patients remain in the practitioner’s care for “an appropriate amount of time” prior to leaving, so that they can inform the practitioner of any abnormalities or disturbances.
* That the Clinical Guidelines for Chiropractic Practice in Canada be upgraded every two years to keep practicing chiropractors up to date.
* That chiropractic schools, associations and regulatory agencies ensure all of their members maintain their skills by taking mandatory courses.
The decision in the Lewis case will allow the family to pursue its multimillion-dollar lawsuit against Dr. Emanuele.
Lawyers for the CCA and the CMCC expressed disappointment with the jury’s verdict, saying it “represents a massive miscarriage of justice.” In a statement to the media, attorney Tim Danson said the chiropractic profession would appeal the decision on the grounds that there was “a complete failure of justice in the conduct of the inquest.” he also alleged that the coroner’s office suppressed evidence that would have helped the chiropractic profession’s position.
“The public should know, as should the jury, that two of the most distinguished and respected neuropathologists in the world, Dr. David Graham of Glasgow, Scotland, and Dr. Francesco Scaravilli, of London, England, were prohibited from testifying at the inquest [even though] the coroner was aware that as leading world authorities, their opinions commanded great respect, and would have carried considerable weight,” said Mr. Danson. “… Dr. Graham and Dr. Scaravilli formed the opinion that this was the clearest case they have ever seen of a person dying as a result of natural causes, and any other explanation would be grossly speculative and unscientific.”
This decision marked the first time in Ontario, and only the second instance in Canada, in which chiropractic manipulation of the neck was the subject of a coroner’s inquest. The first inquest examined the death of Laurie Jean Mathiason, a 20-year-old woman from Saskatoon, Manitoba, who died in February 1998, three days after suffering a stroke while being adjusted. The jury in that inquest ruled that more research was needed to determine the risks and benefits of neck adjustment, and that the public be better informed.
Even before the jury ruled the death of Lana Lewis an accident, however, Canadian chiropractors were beginning to feel the backlash of the inquest. According to an article in the Toronto Globe and Mail, the Lewis inquest “subjected the chiropractic industry to terrible publicity,” and some practitioners have reported a drop in billings and the number of patients treated by more than 20 percent.
But the battle does not end here, as Mr. Danson made clear in his comments to the media: “Wc have instructed our counsel to bring an Application for judicial Review before a three judge panel of the Superior Court of justice (Divisional Court) to quash the verdict on the grounds that it is perverse, and on the grounds that there has been a complete failure of justice in the conduct of the inquest.”
Resources
1. Bonnell G. Death of chiropractie patient in 1996 an accident, coroner’s jury rules. Canadian Press, Jan. 16, 2004.
2. Marshall E, Cuthbertson D. Chiropractie procedure blamed in death. Can West News Service, Jan. 17, 2004.
3. Chiropractie treatment needs safety review: jury. CBC News, Jan. 16, 2004.
4. Coroner’s inquest in Canada. Dynamic Chiropractic, Aug. 16, 2002. www.chiroweb.com/archives/20/17/05.html
5. Information Bulletin from the Chiropractic Communications Working Group, Jan. 16, 2004.
6. Katz denied standing in Canadian inquest … again. Dynamic Chiropractic, Nov. 4, 2002. www.chiroweb.com/archives/20/23/13.html
7. Lana Dale Lewis Inquest. Notable points of testimony & evidence to date. Submitted to Dynamic Chiropractic by Jonathan Bennett, Canadian Memorial Chiropractic College, Jan. 21,2004.
8. Legal counsel Tim Danson media statement. Submitted to Dynamic Chiropractic by Jonathan Bennett, Canadian Memorial Chiropractic College, Jan. 21, 2004.
9. Toronto coroner disqualified Murray Katz, MD, from inquest. Dynamic Chiropractic, May 21, 2001. www.chiroweb.com/archives/19/11/18.html
Copyright Dynamic Chiropractic Feb 26, 2004
Provided by ProQuest Information and Learning Company. All rights Reserved
August 15, 2007 at 4:57 pm · Filed under insurance, mortgage
Before extending a mortgage, lenders typically require borrowers to make a sizable down payment to reduce both the risk of default on the loan and the amount they stand to lose if a foreclosure is necessary. Moreover, borrowers often pay significant closing costs. Together, the down payment and closing costs can be substantial relative to the borrower’s savings, particularly for first-time homebuyers and households with lower incomes.
Mortgage lenders usually require a down payment of at least 20 percent of the appraised value of a home. But they will accept smaller down payments if repayment of the mortgage is backed by a type of insurance, paid for by the borrower, known as mortgage guarantee insurance. Mortgage insurance for low-down-payment loans is available from the federal government, primarily through programs administered by the Federal Housing Administration and the Department of Veterans Affairs, and from the private sector.
Insurance on a mortgage comes into play when the homeowner defaults on the loan and the proceeds from the subsequent sale of the mortgaged property fail to cover the remaining debt plus the costs associated with the sale. In such a case, the mortgage insurer reimburses the lender for the shortfall, generally in full if the insurance is governmental but only up to certain limits if the insurance is private. Because insurers bear at least part of the risk of loss on home loans, they must carefully review the qualifications of prospective borrowers and the value of the collateral provided by the property being purchased.
Early forms of mortgage insurance arose in the private sector around the turn of the century and developed until the onset of the Depression. The private mortgage insurance industry then collapsed, and its function was assumed by the federal government, which was the only source of mortgage insurance from the mid-1930s through the late 1950s. Today, mortgages backed by government insurance continue to play a significant role in the home finance market, but mortgage insurance offered by the private mortgage insurance industry is also widely used by homebuyers and those refinancing their existing mortgages. Private mortgage insurance backed nearly 1.2 million single-family home loans extended in 1993, representing about 45 percent of all the insured mortgages granted that year.
This article reviews some of the history of the mortgage insurance industry, outlines the way the mortgage insurance business is conducted, examines the financial implications for a borrower choosing between governmental and private mortgage insurance, and discusses the disposition of recent applications submitted to private mortgage insurers. Little information has been available heretofore about the disposition of applications. This year, however, the private mortgage insurance industry released data on the disposition of the cases that private insurers acted on during the fourth quarter of 1993 and on the characteristics of the households in those cases (see box, “Data Disclosed by the Private Mortgage Insurance Industry”). The article summarizes the new information and draws some comparisons with data on applications for government insurance and with mortgage applications generally.
August 8, 2007 at 7:36 am · Filed under insurance, mortgage
From the lender’s perspective, the mortgage insurance provided both by private mortgage insurers and by government agencies such as the FHA and the VA reduces credit risk, but the level of protection varies. PMI companies typically limit coverage within a range of 20 percent to 25 percent of the claim when a mortgage defaults, whereas the FHA, for instance, covers 100 percent of the unpaid balance of the mortgage to the lender as well as some, but not necessarily all, of the costs associated with foreclosure and the sale of the property. For marginally qualified borrowers, some lenders might prefer the added protection afforded by FHA insurance and they may encourage borrowers to apply for these mortgages. Lenders may have other incentives to encourage applicants to apply for one loan program over another. For example, FHA-insured mortgages provide lenders with greater income from loan servicing than do the mortgages covered by PMI. On the other hand, the origination of mortgages insured by PMI often requires less paperwork.
From the perspective of homebuyers, the costs and availability of the insurance offered by FHA, VA, and private companies can differ markedly. The homebuyers’ knowledge of these alternatives varies with their experience, their willingness to shop among lenders, and the extent of information provided by real estate agents and others. Real estate agents, as well as others, sometimes encourage homeowners to select one type of insured mortgage product over another.
Incentives for Using Government Insurance
Most households are able to purchase homes or refinance an existing mortgage without mortgage insurance and thus avoid the added cost of the insurance. Many households, however, lacking the assets necessary for a sizable down payment and closing costs, can qualify only for a mortgage with a high loan-to-value ratio and thus must purchase mortgage insurance. In addition, some households prefer making a small down payment toward a mortgage even if they have the funds for a larger down payment; they, too, are normally required by the lender to purchase mortgage insurance.
The eight private mortgage insurance companies recently made data publicly available that, for the first time, describes the disposition of applications for insurance by the characteristics of the mortgage borrower. These data are comparable to those supplied by mortgage lenders under the Home Mortgage Disclosure Act (HMDA). The PMI data cover applications for mortgage insurance acted on only during the fourth quarter of 1993. The companies limited their 1993 data to this quarter to allow themselves adequate time to develop procedures for receiving, tracking, and reporting activity in a manner consistent with the requirements of HMDA. Information about the PMI industry indicates that fourth-quarter activity accounted for nearly 30 percent of all 1993 PMI commitments written on home mortgage loans.(18) The nature of the fourth-quarter mortgages and their disposition may or may not be representative of the rest of the year.
For applications pertaining to properties in metropolitan statistical areas (MSAs), the PMI companies identified properties by census tract number. Lenders covered by HMDA, in contrast, currently identify property location by census tract only for loans in metropolitan areas where they have, or are deemed to have, a home or branch office.(19)
For the eight PMI companies, the Federal Financial Institutions Examination Council prepared disclosure statements detailing a company’s activities for each MSA in which it had business. In total, the FFIEC prepared disclosure statements relating to 1,894 MSAs, an average of 237 MSAs for each PMI company. In contrast, the typical lender covered by HMDA in 1993 received a disclosure statement that included information on an average of only 3.7 MSAs.
Volume of Applications for PMI
In the fourth quarter of 1993, PMI companies acted on roughly 456,400 applications for insurance: 265,400 for insurance to back home-purchase mortgages on single-family properties and 191,000 to insure refinancings of existing mortgages (table 5). Most applications dealt with mortgages of less than $150,000. The average size of the home-purchase mortgages was $116,200.
The mortgage size distribution and the average mortgage size for home-purchase mortgages are only slightly different from those for refinancings. This relationship is somewhat surprising because of the large proportion of first-time homebuyers in the home-purchase category; such homebuyers typically have lower incomes than other homeowners and consequently take out smaller loans than homeowners who are refinancing.
Characteristics of Applicants for PMI
In 1993, more than two-thirds of the PMI applicants seeking home purchase mortgages had incomes that exceeded the median for the MSA in which the property securing the loan was located (table 6). The distributions of PMI applicants by income differ between those seeking loans to purchase homes and those applying for insurance to refinance an existing loan. In particular, the proportion of insurance applicants in the highest income group (income greater than 120 percent of the median family income in their MSA) was significantly larger for refinancings than for home-purchase mortgages. Once again, this difference probably reflects the high proportion of first-time, and perhaps younger, homebuyers in the home-purchase category.
The racial and ethnic characteristics of PMI applicants were similar to those of mortgage applicants covered by the HMDA data. Most applicants for loans backed by PMI were white, and about half were seeking insurance for mortgages to be secured by properties located in neighborhoods in which the nonwhite and Hispanic population was less than 10 percent of the total.(20) Overall, about three-fifths of the applicants were seeking insurance to help buy a home or refinance mortgages on properties located in the non-central-city portion of MSAs.
A Comparison of Applicants for PMI and for Government Insured Mortgages
The vast majority of mortgages insured by the FHA and VA have high loan-to-value ratios at the time of origination. For example, among all FHA single-family mortgages originated in 1993, 94 percent had a loan-to-value ratio exceeding 80 percent, and 78 percent had a ratio exceeding 90 percent.(21) The vast majority of mortgages backed by PMI also have high loan-to-value ratios, but the pool of FHA-insured mortgages includes many with loan-to-value ratios that exceed PMI limits. Because PMI companies, the FHA, and the VA all serve households applying for mortgages with low down payments, comparisons of the characteristics of the applicants applying for insurance under each program are appropriate.
We conducted such a comparison, using data on FHA and VA lending activity drawn from information filed for 1993 by lenders covered by HMDA. The comparisons are limited to applications for mortgages secured by properties in MSAs. In addition, the samples of applications used for the comparison was restricted to mortgages that fell within the size limits established by the FHA for single-family mortgages.
Our comparison indicates that the majority of applicants for both government-backed and privately insured home-purchase loans had incomes that were below the median family income for their MSA (table 7). Applicants for the governmentbacked programs, however, were relatively more likely to have modest incomes: for example, for home-purchase loans, 68 percent of FHA applicants and 65 percent of VA applicants had incomes that were below the median family income for their MSA, compared with 54 percent of the applicants for PMI.
A comparison between applicants of the different insurance programs based on neighborhood income finds a smaller difference. For example, 16 percent of the PMI applicants sought insurance for home-purchase mortgages for properties in low- or moderate-income census tracts, compared with 18 percent of the FHA applicants and 16 percent of the VA applicants. Thus, the insurance programs seem to have a similar distribution of applicants across neighborhoods grouped by income, but the FHA and the VA generally serve a lower-income clientele.
The distribution of applicants by racial or ethnic characteristics indicates that the FHA and VA received a higher proportion of requests for insurance from black applicants than did PMI companies, whereas the latter had a higher proportion of Asian applicants. Relative to the VA, the FHA and the PMI companies both had a larger proportion of Hispanic applications, a result that perhaps reflects a lower proportion of Hispanic veterans. The government insurance programs were also more likely to receive applications secured by properties in census tracts where minority residents exceeded 10 percent of the population and in census tracts in central cities.
Disposition of Applications for Mortgage Insurance
PMI companies approved most of the applications for insurance that they acted on during the fourth quarter of 1993–roughly 85 percent of applications for insurance to back home-purchase loans and 87 percent to back refinancings (table 8). The insurers denied about 12 percent of home-purchase applications and about 10 percent of refinancing applications; in a relatively small percentage of cases, applications were withdrawn by the lender or files were closed after additional information needed by the insurer to make a decision was not provided.
Most applications for PMI were approved in 1993, but the approval rate varied substantially across metropolitan areas. In particular, applications for insurance for home-purchase mortgages secured by properties located in all California MSAs and in most Florida MSAs had relatively high rates of denial. Denial rates in California were as high as 33 percent in some areas, including Los Angeles. In California, the aggressive pursuit of customers by mortgage originators and a weak housing market may have led to higher proportions of marginally qualifed applicants for mortgage insurance. The explanations for high denial rates in Florida are less certain, but suggestions range from a high proportion of condominiums and second homes to a local economy that is prone to greater volatility in housing prices. In contrast, many MSAs in the Midwest–including Chicago, Detroit, and St. Louis–had denial rates well below the national average.
Multiple Applications
In general, the relatively high approval rates for PMI are to be expected; lenders submitting applications for insurance know the prospective borrower’s credit circumstances and the credit underwriting guidelines used by the PMI companies.(22) However, unlike mortage lenders, who charge a fee to applicants, PMI companies do not charge for the submission of applications; consequently multiple PMI applications are potentially more common than multiple mortgage applications and may skew the statistics.
August 7, 2007 at 10:53 am · Filed under mortgage
New legislation designed to increase loan limits under the National Housing Act for multifamily housing mortgage insurance has received unqualified support from the Hudson River Property Owners and Conservators Association (HRPOCA).
In a letter to Marge Roukema (R-NJ), co-author of “H.R. 1629″ with fellow New Jersey Congressman Bob Frank, the Hoboken, N.J.-based group of propertyowners along the Hudson River’s “Gold Coast” praised the effort to increase the Housing and Urban Development mortgage insurance statutory limits by 25%, which it contends will permit continued redevelopment in New Jersey’s urban areas.
“As you are well aware, it has become very expensive to develop and produce moderate and middle-income housing throughout New Jersey,” according to the letter, which is signed by developers Joseph Barry and Carl Goldberg, HRPOCA’s Co-Chairmen.
“High labor costs, permitting costs and high land values all make it extremely difficult to develop multi-family housing unit’s within the present statutory limits — especially in the older urban centers which require mid- or high-rise construction.
Thus, it is critical to New Jersey’s Master Plan, which intends to keep green areas green and put development where the infrastructure already exists, that the mortgage insurance statutory limits be increased.”
Introduced in April of this year, “The FHA Multifamily Housing Mortgage Loan Limit Adjustment Act of 2001,” has been recently referred to the House’s Committee on Financial Services.
COPYRIGHT 2001 Hagedorn Publication
COPYRIGHT 2001 Gale Group
