Mortgage insurers have been dramatically tightening their standards throughout the nation, further squeezing potential home buyers.
Stung by growing defaults, lenders are offering borrowers fewer ways to avoid purchasing private mortgage insurance. The insurers face massive borrower defaults on loans that were approved when securing a mortgage was far easier.
During the housing boom, when lending standards loosened drastically, borrowers often avoided mortgage insurance by taking out two loans, one that covered 80 percent of the purchase price and a second, “piggyback” loan to cover the once-traditional down payment.
The so-called penetration rate, which compares the balance of all loans covered by mortgage insurance with the balance of all mortgage loans underwritten during the same period, jumped from about 8. This year, mortgage insurers have benefited from the growing number of loans being funded by Fannie Mae (the Federal National Mortgage Association ) and Freddie Mac (the Federal Home Loan Mortgage Corp. ), the government-sponsored, stockholder-owned mortgage companies that require mortgage insurance on loans that don’t have a substantial down payment.
But the crisis of confidence facing Fannie Mae and Freddie Mac raises major concerns about the pipeline of business flowing to mortgage insurers.
75 percent of the loan balance for fixedrate, 30-year mortgages with a 10 percent down payment, up from 0. 67 percent this month. Some mortgage brokers are turning instead to the Federal Housing Administration, whose more-lenient loan program requires only a 3 percent down payment. The government agency’s share of the mortgage market has grown to about 10 percent to 12 percent recently, compared with about 3 percent when private-sector loans were easiest to obtain.
“It’s either an FHA loan or a conventional buyer with 20 percent down,” Ayad said.