First it was the lenders. Now it's the mortgage insurance industry: Entire product lines are being yanked off the real estate financing shelf, potentially squeezing large numbers of buyers and refinancers out of the market.
On Feb. 6, the oldest and largest private insurer of home loans -- MGIC -- issued a bombshell warning that, in large parts of the country, it would no longer provide coverage on cash-out refinancings, reduced-documentation loans, mortgages with down payments less than 5 percent, loans for rental houses or other non-owner-occupied investor properties, and mortgages with negative amortization features, such as payment-option loans.
The bans, which take effect March 3, cover four states in their entirety, the District of Columbia, plus 25 other major real estate markets. The states are Arizona, California, Florida and Nevada. Metropolitan markets on the list include the Maryland and Northern Virginia suburbs of Washington, D.C. and Baltimore.
MGIC also tightened eligibility standards nationwide on a number of low-down-payment loan categories:
Homebuyers who seek mortgages with less than 5 percent down must now have minimum FICO credit scores of 680, up from the previous 620.
Cash-out refinancings on all non-owner-occupied rental or investment properties no longer will be eligible for insurance.
Borrowers who seek to use reduced documentation plans must now make minimum down payments of 10 percent, have FICO scores of 660 or higher, and be able to demonstrate that at least 50 percent of their annual income is derived from self-employment.
All buyers of condominiums in declining markets will now need to come up with 10 percent down payments. Buyers of single-family homes in those areas with less than 10 percent down payments will need FICOs of 680 or higher.
Milwaukee-based MGIC is a giant in the industry with nearly $200 billion in insurance coverage in force on 1.3 million mortgages. Like other private mortgage underwriters, it provides lenders protection against losses on low-down-payment loans -- those with less than 20 percent borrower equity. Competitors are expected to adopt cutbacks similar to MGIC's in the coming weeks.
Private mortgage insurers played a key role during the housing boom by helping millions of people with modest incomes and marginal credit to purchase homes with minimal down payments. But now the industry is facing rising claims on loans that went sour. MGIC, for example, estimates that it lost $1.3 billion during the fourth quarter of 2007, according to Michael J. Zimmerman, senior vice president for investor relations.
MGIC's retrenchment parallels recent moves by mortgage lenders. Most of them are now restricting the hyper-creative financing that powered the boom. Essentially the industry is saying: We were willing to go with the flow when all the arrows were pointing up during the boom years, but now that party is over.
The major bright spot still left for purchasers seeking a home with low down payments: FHA. The Federal Housing Administration's insurance program has no connection with private insurance. Borrowers can still put 3 percent down and qualify for a fixed-rate, 30-year FHA loan.