Lexington, KY - Foreclosures, short sales, auctions and mortgage bailouts have become synonymous with the downturn of the real estate industry. Mortgage bailout assistance initially released by the Bush administration appears to be just the first phase of a potential multi-phase proposal designed to assist homeowners who have adjustable rate mortgages (ARM) that meet specific guidelines and qualifications.
Currently, those with fixed rate loans do not qualify. The concept of a national mortgage bailout plan has been controversial. Many feel that people who were irresponsible enough to get themselves into bad loans do not deserve to be bailed out. Some feel that lenders were deceptive and predatory in their practices and homeowners should be helped. Others feel there should be a limited option available, where someone could not just walk away from their obligations, but some assistance should be provided.
The record amount of foreclosures has affected millions of households as a result of the government not properly regulating how banks distributed loans to borrowers. A national mortgage bailout plan is particularly desirable when the mortgage crisis is so bad that it actually threatens a country's economy and stock market.
The nation's two largest residential mortgage funding companies, already under government conservatorship, may be asking for additional money in the coming weeks as loan delinquencies loom larger and many sub-prime securities in their portfolios continue to decline. Freddie Mac has requested intent to borrow another $30 billion to $35 billion in order to make up for projected fourth quarter losses. Rival company Fannie Mae is likely to ask for $5 billion to $10 billion for similar efforts. The two mortgage giants guarantee or hold almost half of all U.S home loans, and both were seized last September by the federal government as both faced deep portfolio losses that could ultimately have led to bankruptcy. Chartered by Congress, both Fannie Mae and Freddie Mac were government-sponsored entities to help provide money for increased homeownership but were run by private interests.
Freddie Mac and Fannie Mae also dictate the amount of required insurance for the borrower. This type of insurance is known as private mortgage insurance (PMI). It is paid for by the borrower and is most commonly needed for mortgages with relatively small down payments because the lender faces greater risk. If the down payment is less than 20 percent of the sales price or appraised value or if the loan-to-value ratio (LTV) is 80 percent or more, PMI is typically required.
According to Money Alert, the definition of PMI is insurance that protects your lender against non-payment should you default on your loan. Further, the primary and only real purpose for mortgage insurance is to protect your lender - not you. As the buyer of this coverage, you're paying the premium so the lender is protected. Consequently, its sole and only benefit to you is a lower down payment mortgage. The average costs of mortgage insurance premiums vary, but typically they fall between one-half and one percent of the loan amount depending on the size of the down payment and loan specifics.
Kristofer Vanzant, senior loan officer for Royal Mortgage, states, "When I run a loan through Fannie or Freddie's underwriting systems, it gives me the insurance rate for the specific borrower, and I then go to the mortgage insurance company Web sites to determine the monthly amount. We put in the characteristics of the loan (loan amount, credit score, LTV, insurance rate coverage dictated by Fannie and Freddie), and it will produce a monthly PMI amount to be charged to the borrower. There are really only four types of loans left in the market."
Those types, Vanzant said, are as follows:
1. Conventional: PMI will be charged on all LTVs above 80 percent.
2. FHA (Federal Housing Administration): PMI is always charged on FHA loans, regardless of LTV. FHA loans also have an upfront mortgage insurance lump sum, called UFMIP (up front mortgage insurance premium). Currently this is 1.75 percent of the loan amount, and it is rolled into the loan.
3. VA (Veterans Administration): VA loans carry no monthly PMI premium, but VA also requires the upfront lump sum premium, called the "funding fee." The upfront VA funding fee varies based upon the LTV and the number of times that the veteran has used their VA eligibility.
4. RHS (Rural Housing Service): RHS loans require no monthly PMI, but RHS also charges the upfront lump sum premium, or funding fee. In almost all cases, the RHS funding fee is 2 percent of the loan amount and it can be rolled into the loan. The RHS loan can't be used everywhere. Bourbon, Scott, Jessamine and Woodford counties are eligible, along with portions of Clark and Madison counties.
Most of the PMI companies (MGIC, PMI, AIG United Guaranty, RMIC, and Radian) will underwrite the loan files themselves. However, there are some lenders that will underwrite a loan with PMI on it with their staff underwriters.
Dreams of reaching 70 percent homeownership, during the Clinton and Bush administrations, increased the level of high LTV to no-income documentation loans to reach the population that did not own houses, in effect requiring PMI. The PMI companies had credit analysts who kept saying that the new aggressive loan types were going to come back to haunt them, which ultimately occurred.
Can PMI prevent foreclosures? No. The only type of mortgage insurance that can prevent foreclosures is mortgage disability insurance, if the homeowner becomes disabled. Another option is mortgage life insurance, which pays off the loan if the homeowner passes away.
Vanzant further stated, "Ultimately, the mortgage insurance is a policy that helps to reimburse the lender for any losses experienced after the foreclosure procedure is finalized. Unfortunately, mortgage insurance is a taboo subject with most homebuyers. Until recently, there were many ways to avoid mortgage insurance, with the most popular being the ability to take out a second mortgage for the portion being borrowed above the 80 percent LTV mark. With the disappearance of the second mortgage market, we are now faced with using conventional, FHA and rural housing loans. All these loan types require either monthly or up front mortgage insurance for any borrower who is not putting down 20 percent on their home. It looks like MI is going be a necessary evil until the second mortgage market gets healthier."
Jennifer Mossotti, CCIM, is a Realtor
with Prudential de Movellan Real Estate and former LFUCG Councilmember.
She can be reached at jennifermossottii@insightbb.com.