So what are buyers to do? Today is yet another day, another piece of evidence that waiting for mortgage rates to fall is a flawed financial strategy, as suggested in a piece from the Mortgage Reporter. Perhaps this review will help stimulate more mortgage activity.

Here is what is truly going on. Let us take a closer look at private mortgage insurance (PMI) today versus last year:

• PMI defaults are up 40 percent and

• Mortgage insurers are booking huge losses. 

In response, PMI firms are now taking a page out of Fannie Mae’s playbook.

• First, to help reduce the number of defaults nationwide, the PMI companies have dramatically tightened their underwriting guidelines: new requirements include minimum credit scores and maximum loan-to-value (LTV) checks, among others.

•  And, second, they’ve raised their fees.

The Net Negative Affect: Because most mortgage lenders require PMI when the borrower’s equity stake is under 20 percent, the combined effect of these two changes is that fewer Americans can qualify for high LTV home loans, and the ones that can qualify have to pay more to insure themselves. Illustrating this point, the chart below puts things into their proper perspective:

• At 85% LTV, new PMI premiums add 0.210% to homeowner housing costs
• At 90% LTV, new PMI premiums add 0.250% to homeowner housing costs

The Bottom-Line (Numbers Do Not Lie): Mortgage rates could fall by a quarter, but for certain homeowners for whom PMI is mandated, it would not make a difference — mortgage market gains are being offset by PMI rate hikes.Practically, the rate hike in PMI impacts a hypothetical homeowner refinancing his 90% loan-to-value, $250,000, 30-year fixed rate mortgage as follows:

• Pre-October 2008: The 0.47 PMI rate yielded a monthly payment of $97.92

• Post-October 2008: The 0.72 PMI rate yields a monthly payment of $150.00
• That’s an extra $52 a month or $625 in PMI costs annually.

This month’s PMI premium increase is the second rate hike of 2008, largely in response to the soaring volume of new claims filed by lenders. 

With defaults showing few signs of a slowdown, it is likely PMI rates will be raised again.

So, perhaps now is, in fact, the best time to finance. Thoughts?

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Posted in Home Builders, Foreclosures, Private Mortgage Insurance, Delinquency Rates, Residential Real Estate, Historical Perspective, Mortgages, Bankers, Market Trending | One Comment