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.
