Module 8: Private Mortgage Insurance Unit 1: What is PMI? Basics and Qualification MOD8-1_1PMI.CFM (5 MIN) UNIT 1 LEARNING OBJECTIVES In this unit, you’ll learn to: identify the uses and function of private mortgage insurance (PMI); understand basic PMI underwriting standards; understand the current interplay between PMI underwriting and Fannie Mae / Freddie Mac standards; and determine the required PMI requirements based on Fannie Mae / Freddie Mac guidelines. PMI COVERAGE, AND BPMI VS. PMI Mortgage insurance is insurance, including any mortgage guaranty insurance, against the nonpayment of, or default in, an individual mortgage or loan involved in a residential mortgage transaction. Private mortgage insurance (PMI) means mortgage insurance other than mortgage insurance made available under the National Housing Act (i.e., mortgage insurance on Federal Housing Administration-insured loans) or Title V of the Housing Act of 1949 (i.e., mortgage insurance on U.S. Department of Agriculture loans to farmers). [12 United States Code §4901(8), (13)] PMI indemnifies a lender for financial loss on a conventional loan secured by an interest in real estate when a borrower defaults. The lender’s recoverable losses include principal on the debt, any deficiency in the value of the secured property and foreclosure costs. Recoverable losses do not include losses due to flood, earthquake or fire damage, which are separately insurable. Also, PMI is not mortgage life insurance, it is default insurance. Mortgage life insurance pays off the insured loan in the event a borrower dies, becomes disabled or loses their health or income. Private mortgage insurers, while comparable, are unrelated to government-created insurance agencies, such as the Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA), which also insure or guarantee loans made to qualified borrowers. Loans insured by the FHA or guaranteed by the VA have their own guidelines and are not subject to laws controlling PMI. The borrower usually pays the PMI premiums, not the lender, although the lender is the insured and holder of the policy. This type of PMI is called borrower-paid PMI (BPMI).
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Module 8: Private Mortgage Insurance
Unit 1: What is PMI? Basics and Qualification
MOD8-1_1PMI.CFM (5 MIN)
UNIT 1 LEARNING OBJECTIVES
In this unit, you’ll learn to:
identify the uses and function of private mortgage insurance (PMI);
understand basic PMI underwriting standards;
understand the current interplay between PMI underwriting and Fannie Mae / Freddie Mac standards;
and
determine the required PMI requirements based on Fannie Mae / Freddie Mac guidelines.
PMI COVERAGE, AND BPMI VS. PMI
Mortgage insurance is insurance, including any mortgage guaranty insurance, against the nonpayment of, or
default in, an individual mortgage or loan involved in a residential mortgage transaction. Private mortgage
insurance (PMI) means mortgage insurance other than mortgage insurance made available under the National
Housing Act (i.e., mortgage insurance on Federal Housing Administration-insured loans) or Title V of the
Housing Act of 1949 (i.e., mortgage insurance on U.S. Department of Agriculture loans to farmers). [12 United
States Code §4901(8), (13)]
PMI indemnifies a lender for financial loss on a conventional loan secured by an interest in real estate when a
borrower defaults.
The lender’s recoverable losses include principal on the debt, any deficiency in the value of the secured
property and foreclosure costs. Recoverable losses do not include losses due to flood, earthquake or fire
damage, which are separately insurable.
Also, PMI is not mortgage life insurance, it is default insurance. Mortgage life insurance pays off the insured
loan in the event a borrower dies, becomes disabled or loses their health or income.
Private mortgage insurers, while comparable, are unrelated to government-created insurance agencies, such
as the Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA), which also
insure or guarantee loans made to qualified borrowers. Loans insured by the FHA or guaranteed by the VA
have their own guidelines and are not subject to laws controlling PMI.
The borrower usually pays the PMI premiums, not the lender, although the lender is the insured and holder of
the policy. This type of PMI is called borrower-paid PMI (BPMI).
Premium rates are set as a percentage of the loan balance, are calculated in the same manner as interest, and
are paid monthly by the borrower with the principal and interest payments.
Some lenders and PMI carriers offer lender-paid mortgage insurance (LPMI) programs. If issued by the PMI
carrier, the lender will pay the PMI premium (in a lump sum or on a monthly basis) and in turn charge the
borrower a higher interest rate on their principal payments.
A lender that offers LPMI must make an LPMI-specific disclosure prior to approval of a borrower’s loan
application.
This disclosure must include:
a statement that LPMI cannot be cancelled, while BPMI may be cancelled or automatically terminated;
a statement that LPMI usually results in a higher interest rate on the loan;
a statement that LPMI terminates only upon a refinance or payoff of the loan;
a ten-year generic analysis of the costs and benefits of both BPMI and LPMI; and
a statement that LPMI may be federally tax deductible. [12 USC §4905(c)(1)]
Editor’s note — The discussion of PMI which follows assumes BPMI, unless otherwise noted.
Comprehension check
You must answer this question before you may proceed to the next page.
___________ are covered by private mortgage insurance.
VA-guaranteed loans
FHA-insured loans
Conventional loans
All of the above.
QUALIFYING FOR PMI IN FOUR FACTORS
Consider a prospective homebuyer who wants to purchase a detached single family residence (SFR) to occupy
as their principal residence. The terms for payment of the price will be a 10% down payment from funds held
by the buyer/borrower.
The balance of the price will be funded by a conventional fixed-rate mortgage (FRM) which will not exceed the
conventional loan limit of $417,000. Rebates received by the borrower, whether funded directly or indirectly
by the seller from the proceeds of the sale or by the broker from the seller-paid broker fees, will not exceed
3% of the price paid for the property.
However, the loan will fund 90% of the property’s value, a loan-to-value ratio (LTV) which exceeds the 80%
LTV generally considered free from risk of loss should the borrower default. To shift that risk of loss to others,
the lender requires PMI. The lender’s alternative would be to retain the risk and attempt to cover it with an
increase in the rate of interest when the loan amount exceeds 75% to 80% of the property’s value.
A mortgage lender may require any borrower to qualify and pay the premium for PMI as a condition for
making a loan.
Lenders originating loans for borrowers seeking to purchase owner-occupied residential real estate, and
whose down payment is less than 20% of the purchase price will insist the loan be insured by PMI to cover the
risk of loss on a default by the borrower. This requirement is set by the investors who will eventually purchase
the loan. With conventional loans, the investor who sets the minimum guidelines is either Fannie Mae or
Freddie Mac. [Fannie Mae Selling Guide B7-1-01; Freddie Mac Single-Family Seller/Servicer Guide 27.1]
Thus, a mortgage loan originator involved in arranging or negotiating the new conventional financing with an
LTV exceeding 80%, will retain control of the transaction’s destiny and avoid surprises based on their
knowledge of four sets of considerations used by issuers of PMI:
the borrower’s profile;
the property purchased;
loan terms and conditions; and
the loan processing package.
Editor’s note — The guidelines discussed in the ensuing pages are the general minimum set standards of the
three largest PMI providers for PMI on a loan for a primary residence, and do not represent any one insurer’s
guidelines for approval. The full underwriting guidelines of the three largest PMI providers are listed and linked
below.
Related reading:
Underwriting criteria by PMI provider as of mid-2016
MGIC Underwriting Guidelines
Radian Underwriting Guidelines
Genworth Financial Underwriting Guidelines
(IMPORTANT: These links take you outside of the course. You will not receive credit for time spent reading
material outside of this course.)
MOD8-1_2LEVERAGED.CFM (3 MIN)
THE LEVERAGED BORROWER’S PROFILE AND THE PMI CREDIT CHECK
The lender making a conventional loan to fund the purchase of a principal residence when the loan will exceed
80% LTV will require the borrower to meet the qualifications for PMI coverage, not just the lender’s
Additionally, as Fannie Mae and Freddie Mac still do the lion’s share of the industry’s securitization, most
loans subject to PMI will be required to adhere to the ability-to-repay rules. The ability-to-repay rules were
discussed in a prior module.
Comprehension check
You must answer this question before you may proceed to the next page.
A loan-to-value ratio of ___________ triggers private mortgage insurance on a conventional loan.
80%
more than 80%
20%
less than 20%
Type of property
Generally, PMI providers will cover:
single family residences;
two-unit properties;
co-operatives; and
manufactured housing.
Genworth does insure 3-4 unit properties, up to a maximum loan amount of $625,500.
For a property to qualify for PMI coverage, the property must meet the following standards:
property may be used a principal residence, second home, or investment;
vesting of title to the property to be in the name of the individual(s) purchasing the property; and
cash reserves of amount equal to not less than three months of assessments.
All three of the large insurers now welcome investor business, although with attendant changes in restrictions.
MOD8-1_3PMICOVERAGE.CFM (4 MIN)
PMI COVERAGE REQUIRED
For a loan to qualify for PMI, the most permissive guidelines allow:
funding of a purchase-assist or rate and term refinance by a borrower;
a maximum loan amount of $417,000;
a maximum 97% LTV;
a maximum 30-year amortization schedule; and
FRMs or fully-amortizing ARMs.
The PMI providers do allow for cash-out refinances, however the LTV limits and credit score requirements are
accordingly adjusted to reflect the higher risk of default.
PMI insures a percentage of a loan amount. In turn, the loan amount represents a percentage of the
property’s value, called the LTV.
Loans insured by PMI are covered for losses on a percentage of the loan amounts. These percentages are
effectively set by LTV and property guidelines issued by investors. The two main investors are still the
government-sponsored entities, Freddie Mac and Fannie Mae.
Freddie Mac PMI Coverage Requirements
[Freddie Mac Single-Family Seller/Servicer Guide Chapter 4701.1]Freddie Mac also allows custom and reduced
PMI coverage for certain qualified borrowers. Additionally, special rules apply for calculating the LTV used to
determine PMI coverage when the PMI is financed into the principal of the loan. [Freddie Mac Single-Family
Seller/Servicer Guide Chapter 4701.1]
For example, a borrower who puts down 15% of the purchase price on a 30-year FRM from a lender who will,
after closing, sell the loan to Freddie Mac will be required to obtain standard PMI coverage for the lender for
at least 12% of the loan amount.
Comprehension check
You must answer this question before you may proceed to the next page.
The _____________ the loan-to-value ratio, the ____________ the PMI coverage required.
lower; greater
greater; greater
greater; lower
Fannie Mae PMI Coverage Requirements
[Fannie Mae Selling Guide B7-1-02]
As seen above, for certain loan type and LTV combinations, Fannie Mae allows the lender to choose coverage
between two amounts:
a standard PMI coverage (denoted with a ^); or
a below standard, but no less than the minimum acceptable PMI coverage (denoted with a *), plus a
Loan Level Pricing Adjustment (LLPA), usually in the form of a higher interest rate. [Fannie Mae Selling
Guide B7-1-02]
Editor’s note — These criteria are for determining PMI coverage only, and do not indicate minimum
requirements for underwriting approval for a loan.
For example, a borrower who puts down 10% of the purchase price on a 15-year FRM from a lender who will,
after closing, sell the loan to Fannie Mae will be required to obtain PMI coverage for the lender for at least
12% of the loan amount.
AUTOMATED UNDERWRITING AND PMI QUALIFICATIONS
Due to the heavy influence the GSEs have held in the mortgage industry over the past few decades, many
lenders use automated underwriting systems (AUS) to determine the marketability of loans to Fannie Mae and
Freddie Mac. Fannie Mae’s AUS is called Desktop Underwriter (DU); Freddie Mac’s is called Loan Prospector
(LP).
Lender underwriters verify the information on the loan application is in line with submitted credit and
property information. Application and credit data is then entered into an AUS for a decision, based on each
GSE’s underwriting guidelines.
PMI providers have likewise adapted their qualification standards to suit AUS decisions. While not entirely
supplanting the manual underwriting and verification duties of the lender or the PMI provider, AUS decisions
streamline the process and are sometimes considered in tandem with existing PMI provider guidelines. The
level of interactivity with AUS decisions varies by PMI provider, but PMI providers generally accept GSE AUS
decisions, subject to additional PMI provider underwriting requirements, called overlays.
For example, Radian’s One Underwrite program qualifies a PMI applicant’s DTI ratios based on whether they
were deemed Eligible by DU, rather than reviewing DTI ratios independently. The Eligible decision is subject to
five Radian underwriting overlays confirming minimum credit score requirements, property type and
minimum borrower contribution.
LOAN PACKAGING FOR PMI DOCUMENT EFFICIENCY
Full documentation in the loan packaging process is fundamental to a lender controlling their risk of loss on
each loan they originate.
Fundamentals of mortgage lending call for full documentation, analysis of credit and income, and a review of
the completed package by the lender who will end up actually owning the loan and taking the risk.
A knowledgeable mortgage loan originator should be able to pre-determine the likelihood of closing a loan by
conducting their own review of a borrower’s credit score and source of funds. Only then are they ready to
commence the search for suitable loan product and lender (taking into consideration the PMI guidelines of the
lender’s preferred PMI provider) on behalf of a borrower.
At a minimum, the application to the PMI provider must include:
a copy of the loan application;
a credit report current within 90 days and covering a minimum of two years; and
an appraisal of the real estate to be purchased.
However, the PMI provider may also require additional documentation to verify the loan transaction fulfills
the insurer’s underwriting requirements, including:
verification of occupancy status;
a copy of the signed purchase agreement/sales contract;
verification of funds for closing;
verification of the borrower’s salary/wages, including overtime and second jobs; and
verification of employment.
Unit 2: Defaults and Cancellations
MOD8-2_1DEFAULTS.CFM (4 MIN)
UNIT 2 LEARNING OBJECTIVES
This unit will teach the student to:
identify the PMI provider’s responsibilities in the case of a borrower’s default;
determine minimum cancellation requirements and timelines for PMI under the Homeowners
Protection Act (HPA) of 1998; and
understand the penalties for a failure to adhere to the HPA.
DEFAULTING BORROWER AND PMI RECOURSE
Most private mortgage insurance (PMI) contracts do not authorize the carrier to seek indemnity from the
borrower for claims made on the policy by the lender — unlike Federal Housing Administration (FHA) or
Department of Veterans Affairs (VA) insurance programs which place borrowers at a risk of loss for a greater
amount than their down payment.
However, if the loan is recourse, the lender’s right to seek a deficiency judgment may be assigned to the PMI
carrier.
Most insured loans are purchase-money loans made to borrowers looking to acquire their principal residence.
Purchase money loans are nonrecourse obligations, with recovery on the loan limited to the value of the real
estate. [26 Code of Federal Regulations §1.1001-2]
In the case of fraud on recourse or nonrecourse loans, the PMI carrier is not barred by anti-deficiency statutes
and will be able to enforce collection of their losses against the borrower for misrepresentations, such as a
misrepresentation of the property value.
Consider a lender whose loan is secured by a first trust deed on a personal residence in default.
The lender forecloses on the property by a trustee’s sale and acquires the property by bidding the dollar
amount of its current fair market value (FMV). The lender then submits its claim to the insurer, including
documents showing the price bid at the trustee’s sale and a recent appraisal of the property.
If the owner of the property is in default, and the insured lender is willing to work out a short sale, the PMI
carrier must be notified immediately of the impending short payoff. PMI will not cover loan discounts on short
sales unless the owner is in default.
Additionally, PMI policies contain a physical damage exclusion which generally excludes the following damages
from coverage:
toxic contamination;
earthquakes;
floods; or
civil unrest.
Comprehension check
You must answer this question before you may proceed to the next page.
Purchase money loans are _____________, with recovery on the loan limited to the value of the real estate.
nonrecourse
recourse
THE RIGHT TO CANCEL UNDER THE HOMEOWNERS PROTECTION ACT OF 1998
Prior to July 29, 1999, homeowners experienced noted difficulty in cancelling borrower-paid PMI (BPMI),
either as a result of convoluted lender cancellation policies or blatant lender refusal to cancel PMI upon
request.
The Homeowners Protection Act of 1998 (HPA) established uniform PMI cancellation policies for home loans,
and went into effect for all loans closed on or after July 29, 1999. [12 United States Code §§4901-4910]
IN THE NEWS
In August of 2015, the CFPB issued a guidance bulletin on HPA guidelines, citing “substantial industry
confusion over PMI cancellation and termination requirements” and continuing violations of the HPA. [August
4, 2015 CFPB Press Release, “CFPB Provides Guidance About Private Mortgage Insurance Cancellation and
Termination.”]
SCOPE OF THE HPA
The scope of the HPA is limited to PMI issued on loans for the purchase, construction or refinance of a
principal residence. Thus, PMI for loans secured by second homes is not covered under the HPA.
However, both Fannie Mae and Freddie Mac have adopted the HPA requirements for loans secured by second
homes, effectively extending the disclosure and cancellation requirements to second homes— at least for
those loans purchased by the two GSEs.
Note also that lender-paid mortgage insurance (LPMI) cannot be cancelled or terminated, and is not subject to
any of the cancellation/termination or disclosure requirements discussed below, except where specifically
indicated. [12 USC §4905(b)]
For home loans closed on or after July 29, 1999
Under the HPA, when the borrower qualifies for PMI and a policy is issued, the lender must notify the
borrower of the borrower’s right to cancel the PMI:
at the time of closing; and
each year thereafter. [12 USC §4903]
The notice of right to cancel PMI delivered at the time of closing must include:
a written amortization schedule;
notification of the borrower’s right to cancel PMI at the 80% LTV mark based on either:
o the written amortization schedule; or
o actual payments;
(if an ARM) notification that the lender/servicer will notify the borrower of the cancellation date;
the date and conditions for automatic PMI termination; and
exemptions to the right to cancel PMI on high-risk loans, and whether those exemptions apply to the
borrower’s loan. [12 USC §4903(a)(1)]
The annual notice of right to cancel PMI must include:
the borrower’s right to and the conditions for a request for cancellation of the PMI;
the borrower’s right to and the conditions for automatic termination of the PMI; and
the contact address and phone number of the loan servicer the borrower may contact for questions
about cancelling the PMI.
For home loans closed before July 29, 1999
The requirements of the HPA were not retroactive under federal law. Thus, for any loans closed before the
effective date of July 29, 1999, the right to cancel is determined by controlling state law or investor guidelines.
An annual notice must still be provided to the borrower, and must include:
a disclosure stating the borrower may be able to request a cancellation of PMI, depending on state law
or investor guidelines; and
the contact address and phone number of the loan servicer the borrower may contact for questions
about cancelling the PMI. [12 USC §4903(b)]
If the borrower and the lender agree to a loan modification, the cancellation and termination dates must be
recalculated to reflect the modified terms of the loan. [12 USC §4902(d)]
MOD8-2_2BPMI.CFM (4 MIN)
BUYER-REQUESTED CANCELLATION OF PMI
Under federal law, PMI can be:
cancelled upon borrower request [12 USC §4902(a)];
automatically terminated by the termination date [12 USC §4902(b)]; or
automatically terminated by the final termination date. [12 USC §4902(c)]
A borrower may cancel PMI if they:
submit a written request to the server to initiate the cancellation of PMI;
have not had a 60-day late on their mortgage in the 24 months prior to the later of:
o the date the LTV reaches 80%; or
o the date of the borrower’s request for cancellation;
have not had a 30-day late on their mortgage in the 12 months prior to the later of:
o the date the LTV reaches 80%; or
o the date of the borrower’s request for cancellation;
are current on their mortgage payments; and
provide evidence to the lender that:
o the property securing the loan has not declined in value; and
o the property is not encumbered by any subordinate liens. [12 USC §4901(4); 12 USC §4902(a)]
If a servicer determines the borrower has not met the above requirements for PMI cancellation, the servicer
must provide written notice of the reason why the cancellation request is being denied. This notice must
include the results of any appraisal relied on in making the decision. [12 USC §4904(b)(1)]
TERMINATION OF PMI AND THE LPMI ELIMINATION NOTICE
If the borrower does not meet the criteria for requesting cancellation of PMI, PMI will automatically
terminate on the automatic termination date. The automatic termination date is:
if the borrower is current on their mortgage payments, the date the LTV reaches 78%, based on the
initial amortization schedule (or the current amortization schedule, if the loan is an ARM) [12 USC
§§4901(18), 4902(b)(1)]; or
if the borrower is not current on their mortgage payments when the LTV reaches 78%, the first day of
the first month after the date the borrower becomes current on their mortgage payment.[12 USC
§4902(b)(2)]
If PMI is not otherwise cancelled or terminated and the borrower is current on their mortgage payments, PMI
must be terminated on the first day of the month following the midpoint of the amortization schedule, called
the final termination date. [12 USC §4902(c)]
If PMI is not otherwise cancelled and the borrower is not current on their mortgage payments, PMI must be
terminated when the borrower become current on their mortgage payments. [12 USC §4902(b)]
Within 30 days of what would have been the automatic termination date on the same loan with BPMI, the
loan servicer of a loan with LPMI must provide a written notice informing the borrower that they may wish to
review their options for eliminating LPMI, e.g., a refinance. [12 USC §4905(c)(2)]
Comprehension check
You must answer this question before you may proceed to the next page.
__________ may be cancelled upon borrower request.
BPMI
LPMI
Both of the above.
Neither of the above.
EXCEPTIONS FOR HIGH-RISK LOANS
A high-risk loan is either:
a loan with a conforming loan amount determined to be a high risk by Fannie Mae or Freddie Mac; or
a loan with a non-conforming loan amount determined to be a high risk by the originating lender. [12
USC §4902(g)(1)]
Conforming high-risk loans cannot be cancelled by borrower request or terminated automatically. Instead,
PMI is terminated on the first day of the month following the midpoint of amortization schedule, provided the
borrower is current on their mortgage payments, called the final termination date. [12 USC §4902(c)]
If the borrower is not current, PMI must be terminated when the borrower become current on their mortgage
payments. [12 USC §4902(c)]
Neither Fannie Mae nor Freddie Mac have actually defined or given the criteria for a high-risk loan, however
they have federal statutory authority to do so. [12 USC §4902(g)(1)(A)]
Non-conforming high-risk loans cannot be cancelled by borrower request, but must be automatically
terminated once the LTV reaches 77%, based on the initial amortization schedule (or the current amortization
schedule, if the loan is an ARM). [12 USC §4902(g)(1)(B)]
As with conforming loans, if PMI is not terminated automatically, it must be terminated on the first day of the
month following the midpoint of amortization schedule, provided the borrower is current on their mortgage
payments. [12 USC §4902(c)]
MOD8-2_3DEADLINES.CFM (3 MIN)
DEADLINES FOR PAYMENTS AND RETURN OF PREMIUMS AND REQUIRED NOTICE OF
CANCELLATION OR TERMINATION
A lender cannot require payments for PMI premiums more than 30 days after:
the later of:
o the date the lender receives the borrower’s request for cancellation; or
o the date the borrower provides to the lender evidence the borrower has met all borrower-
requested cancellation requirements;
the automatic termination date; or
the final termination date. [12 USC §4902(e)]
The lender and servicer must return all unearned PMI premiums to the borrower within 45 days after the
cancellation or termination of PMI. [12 USC §4902(f)(1)]
Within 30 days of cancellation or termination of PMI, the loan servicer must notify the borrower in writing
that PMI has been terminated and no other PMI payments will be due. [12 USC §4904(a)]
The notice must be given to the borrower within 30 days of:
the later of:
o the date the lender receives the borrower’s request for cancellation; or
o the date the borrower provides to the lender evidence the borrower has met all borrower-
requested cancellation requirements [12 USC §4904(b)(2)(A)]; or
the automatic termination date. [12 USC §4904(b)(2)(B)]
VIOLATION OF THE HPA
Any servicer, lender or PMI provider that violates the HPA is subject to civil penalties.
If a violation of the HPA is confirmed in an action brought about by an individual borrower, the violating
servicer, lender or PMI provider is liable for:
actual money loss, plus interest set by the court;
statutory damages of up to $2,000; and
court and attorney fees.
If a violation of the HPA is confirmed in a class action and the violating servicer, lender or PMI provider is
federally regulated, it is liable for:
the lesser of:
o $500,000; or
o 1% of the liable party’s gross revenues; and
court and attorney fees.
If a violation of the HPA is confirmed in a class action and the violating servicer, lender or PMI provider is NOT
federally regulated, it is liable for:
actual money loss, plus interest set by the court;
statutory damages of up to $1,000 per class member, up to the lesser of:
o $500,000; or
o 1% of the liable party’s gross revenues; and
court and attorney fees. [12 USC §4907(a)]
A borrower must bring about an action based on a violation of the HPA within two years of discovering the
violation. [12 USC §4907(b)]
Comprehension check
You must answer this question before you may proceed to the next page.
The lender and servicer has __________ after the cancellation or termination of PMI to return all unearned
PMI premiums to the borrower.
60 days
75 days
90 days
45 days
FEDERAL LAW PREEMPTION
State laws regarding PMI existed in California, Colorado, Connecticut, Maryland, Massachusetts, Minnesota,
Missouri and New York prior to the enactment of the HPA in July 29, 1998.
These state laws and any amendments to these state laws made before July 29, 2000 were allowed to control
as long as they provided more borrower protection than the HPA. Specifically, these state laws were allowed
to control insofar as they:
provided earlier termination of PMI than the HPA;
required more information be disclosed to the borrower than the HPA; or
required more frequent or earlier disclosure than is required under the HPA. [12 USC §4908(a)(2)]
The HPA also supersedes any conflicting provisions in servicing agreements between servicers and investors
(including Fannie Mae and Freddie Mac). [12 USC §4908(b)]
Unit 3: PMI, MIP or neither?
MOD8-3_1RECENT.CFM (3 MIN)
UNIT 3 LEARNING OBJECTIVES
This unit will teach the student to:
compare and contrast the FHA’s mortgage insurance premium (MIP) with PMI and a 20% down
payment to quickly determine a borrower’s best option; and
review PMI pricing options, based on borrower creditworthiness.
RECENT HISTORY: FHA AND MIP DURING THE PMI EMBARGO
In contrast to private mortgage insurance (PMI) on conventional loans, the Federal Housing Administration
(FHA)’s mortgage insurance premium (MIP) insures lenders against loss due to the foreclosure of an FHA-
insured loan.
From the mortgage meltdown late in 2007 to early in 2010, PMI providers decamped from distressed areas,
leaving any borrowers in those areas with less than a 20% down payment with no other options but to go with
an FHA-insured loan. As a result, FHA loans began to take an increasing share of the mortgage market, even in
notoriously expensive states such as California.
PMI providers have returned to business areas as usual in recent years.
THE COST OF MIP
Recall from the first unit that borrower-paid private mortgage insurance (BPMI) is paid monthly along with
their monthly mortgage principal and interest payments.
Editor’s note — PMI will be used interchangeably with BPMI for the comparisons in this unit.
In contrast, a borrower pays MIP in two ways:
as an up-front fee, set by a percentage of the base loan amount, and paid at the closing of the loan;
and
as an annual premium, set by a percentage of the loan balance, paid monthly. [HUD Handbook
4000.1(II)(A)(2)(e)]
The costs of both kinds of MIP vary depending on loan purpose, term, base loan amount and loan-to-value
(LTV) ratio.
Comprehension check
You must answer this question before you may proceed to the next page.
_________ include(s) both an up-front premium and annual premiums.
Private mortgage insurance
FHA mortgage insurance premiums
Both of the above.
Neither of the above.
Up-Front MIP
Annual MIP
Editor’s note — These updated annual MIP amounts do not impact streamline refinance transactions endorsed
on or before May 31, 2009.
In early 2013, the FHA increased annual MIP rates, and extended the payment period for MIP.
Consider a 30-year fixed-rate mortgage (FRM) for a base loan amount of $250,000. The loan will be used to
purchase a single family residence (SFR) with 3.5% down payment by the borrower. The borrower is quoted a
3.75% interest rate.
Based on the FHA MIP requirements, the up-front MIP for this borrower is 1.75%. The annual MIP is 0.85%.
Thus, the borrower will be paying a 3.75% interest rate + 0.85% annual MIP for a total of 5.10% of the loan
amount — for the duration of the loan. Additionally, they would have paid 1.75% of the loan amount, or
$4,375 in up-front MIP.
Editor’s note — Up-front MIP may be financed into the loan. That option was covered in a previous module. For
purposes of comparing MIP with PMI, we will assume the up-front MIP was paid by the borrower on loan
closing.
MOD8-3_2PMIQUAL.CFM (5 MIN)
FANNIE MAE AND FREDD IE MAC’S 3% DOWN PAYMENT PROGRAMS
Freddie Mac will accept 3% down payments under their new Home Possible Advantage program for
mortgages closing on or after March 23, 2015.
To qualify for a Freddie Mac mortgage with a 3% down payment, a homebuyer needs to:
use the mortgage to fund the purchase or a no-cash refinance; occupy the property securing the mortgage as their primary residence; own no interest in any other residential property as of the note date, eliminating homeowners who
want to finance the purchase of a home before they have sold their current home; have an annual income no greater than the area’s median income (different rules apply for high cost or
underserved areas — a look-up tool for area income limits is available here); purchase or refinance a one-unit, non-manufactured home (condos are allowed); and have a maximum back-end debt-to-income (DTI) ratio of 43% (there is no front-end DTI limit).
First-time homebuyers must first fulfill education requirements, which can be met through:
an internet-based homeownership education program developed by a mortgage default insurance company; or
a homeownership education program which meets the standards set by the National Industry for Homeownership Education and Counseling.
Further, the mortgage needs to be:
a first trust deed lien; conventional (no government-insured mortgages); fully amortizing; a fixed rate loan with a term no longer than 30 years; and within the maximum loan-to-value (LTV) ratio of 97%.
The mortgage insurance coverage level on a mortgage with a down payment greater or equal to 3% and less
than 5% is 18%. These mortgages are not eligible for custom or reduced mortgage insurance.
Fannie Mae now also allows down payments as low as 3%. This is offered through either:
their My Community Mortgage (MCM) program for first-time homebuyers, for those who meet Freddie Mac’s annual income and DTI ratio limitations; or
standard purchase transactions for all other first-time homebuyers who exceed median incomes.
Freddie Mac and Fannie Mae’s rules conform on most points. However, Fannie Mae’s program differs in that:
homebuyers taking out non-MCM mortgages do not have to fulfill education requirements; homebuyers may not have owned a residence during the last three years; and limited cash-out refinances are allowed for non-MCM mortgages.
Fannie Mae and Freddie Mac will allow homebuyers taking out these low down payment mortgages to use
down payment gifts, as long as the property is a single unit. This may bring out the builders, as prior to 2008 it
was common for builders to indirectly gift the full required down payment on Federal Housing Administration
(FHA) and later conventional mortgages (through help of a third party “facilitator”). These Nehemiah loans as
they were sometimes structured, were all the result of 1990s deregulation.
However, Fannie Mae qualifies 2-4 unit and manufactured homes as long as homebuyers make a minimum 3%
contribution which cannot be covered by gift funds.
Fannie and Freddie claim these mortgages will cost the homebuyer slightly less than FHA-insured mortgages.
This is due to the slightly lesser cost of private mortgage insurance (PMI) compared to the FHA’s mortgage
insurance premiums (MIPs).
If the homebuyer and the property meet the program qualifications, the homebuyer may qualify to put down
as little as 3%. However, just because Fannie and Freddie are willing to purchase this low down payment type
of mortgage doesn’t mean lenders will be willing to originate them.
For instance, consider the borrower who purchases a property priced at $300,000 with a 5% down payment
($15,000). To fund the remainder of the purchase price, they opt for a 30-year FRM with mortgage insurance.
With a down payment of less than 20%, they must provide and pay the premiums for PMI, an additional
annual cost equal to 0.89% of the loan balance. They have savings or access to funds for another $45,000
which could be used to bring the down payment to the 20% mark and avoid PMI and the premiums.
Applying this leveraging situation to our $285,000 95% financing, the PMI premium charge payable for the first
year will be roughly $2,537. This premium is entirely avoided if $45,000 is withdrawn from savings and used to
increase the down payment to 20% of the price. The $45,000 is only earning 1% in a bank account, $450
annually, which will be forgone on use of the savings to increase the down payment amount.
Thus, the additional $45,000 used to increase the down payment to avoid PMI premiums earns $2,537 the
first year; an 5.64% annual rate of return, five times more than earnings on the savings withdrawn to raise the
down payment to 20%.
Each year following will realize slightly lesser amounts “saved” until the loan principal is reduced or the home
increases in value to an LTV of 78%, or five years pass and the mortgage insurance is no longer required.
In conclusion, borrowers who can make a 20% down payment need to be advised of the option available to
them, if not directly encouraged by their agents to make the payment. A down payment large enough to avoid
mortgage insurance coverage enables borrowers to reduce their monthly recurring costs of homeownership
while MIP/PMI is in place. The result: a higher rate of return than would otherwise be received on the amount
of the borrower’s savings when used to make the greater down payment and avoid the MIP/PMI.
Unit 4: PMI in the market
MOD8_CS1.CFM (3 MIN)
HOW MORTGAGE INSURERS FARED IN THE GREAT RECESSION
It’s no surprise that the private mortgage insurance (PMI) providers had a rough time in the wake of the
housing crash. With hundreds of thousands of homeowners defaulting on mortgages insured by PMI
providers, the expected happened: PMI providers were unable to keep their mandatory reserves in check, and
some were forced to stop issuing policies.
However, in the recovery which followed, PMI providers have gradually recovered market share and their own
solvency.
PMI IS BACK FROM THE DEAD
In the first quarter of 2012, MGIC reported its seventh-straight quarterly loss, totaling nearly $20 million.
In February of 2012, PMI provider MGIC announced it had gotten waivers from Fannie Mae to continue writing
mortgage insurance policies.
MGIC suffered repeated losses covering mortgage lender risks of loss on foreclosure, inching closer to joining
the ill-fated group of other beleaguered private mortgage insurers, including Radian Group, Inc., PMI Group,
Inc., and Triad Guaranty Inc. PMI and Triad Guaranty Inc. were ordered to stop writing policies, but MGIC
plans to continue business.
The ratio of borrowers reinstating loan payments to those remaining in default has grown more disparate,
from a 95-to-100 ratio in 2010, to an 87-to-100 ratio as of November 2011. While MGIC reported a fourth
quarter net loss of $135.3 million compared to last year’s $186.7 million loss, policy sales have also decreased
2.8 percent and the rate of borrower default continues to drain the company’s resources.
However, MGIC’s balance sheet has improved substantially during the recovery, thanks in no small part to a
spate of FHA MIP rate increases in recent years. As the number of PMI loans increases, the premiums for both
FHA and MGIC policies are rising.
The preventative prescription for this kind of blow to MGIC and other mortgage insurers has always been
borrower skin in the game (and being able to charge profitable premiums in competition with FHA also helps).
A borrower will be much less likely to dump onto mortgage insurance companies the sizable obligation of
paying lenders hundreds-of-thousands of dollars if the borrower has already invested a substantial sum of
money in the property by fronting a 20% down payment.
This 20% indicates the borrower has a real motivation to pay a proper price for a property and then stay with
their chosen property and do all they can to maintain possession of it. 20% is a cushion against price drops
(though this time around down payments and equities even at 50% did not prevent total destruction of the
equity in some instances).
And in early 2013, for the first time since 2010, the private mortgage insurance (PMI) company MGIC
reported quarterly profits.
In the second quarter (Q2) of 2013, MGIC reported:
$196 million in mortgage claims costs; and $12 million in profit.
Compare this to Q2 2012, when MGIC reported:
$551 million in mortgage claims costs; and $274 million in losses.
This outcome seemed virtually impossible one year ago, when MGIC was still suffering under a seemingly
unrelenting barrage of homeowner defaults.
But two key changes in the mortgage market have impacted MGIC’s balance sheet since then:
homeowner defaults decreased — in California the rate was 53% lower in Q2 2013 than in Q2 2012; and
the Federal Housing Administration (FHA) raised their mortgage insurance premiums (MIP) and extended their MIP requirement through the life of the loan.
Considering today’s rising interest rates, the FHA’s increased MIP does little to ingratiate home buyers with
their product. As the disparity in rates between MIP and PMI premiums grows, so does the number of
homebuyers choosing PMI firms like MGIC rather than an FHA-insured loan.
MGIC and other PMI companies can raise a hallelujah — it looks like they may stick around after all and
prosper with the private sector. Home buyers will reap the benefits of this unlikely survival through increased
competition between PMI and FHA MIP rates.
When private insurance providers are left to compete and hash out their differences without government
programs outbidding them, borrowers win.
MINIMUM REQUIREMENTS FOR PMI PROVIDERS
In mid-2014, the Federal Housing Finance Agency, the government entity in charge of Fannie Mae and Freddie
Mac, solicited comment on setting minimum requirements for private mortgage insurance companies to meet
in order to insure loans sellable to Fannie Mae or Freddie Mac.
Beginning December 31, 2015, private mortgage insurers have been required to meet a minimum net worth of
$400 million, to avoid a repeat of the multiple PMI provider failures which occurred after the mortgage
meltdown.
Additionally, each PMI provider is required to have liquid assets exceeding their “minimum required assets”,
which is a figure calculated based on the PMI provider’s exposure.
RECOVERED MARKETS
Since the fallout of the financial crisis, the PMI providers have rebounded. In the second quarter (Q2) of 2016,
all three major PMI providers showed growing or steady net income quarter-over-quarter, with new PMI
policies issued growing year over year from:
$11.9 billion in Q2 of 2015 to $12.9 billion in Q2 of 2016 for Radian [Press Release: Radian Announces
Second Quarter 2016 Financial Results];
$11.6 billion in Q2 of 2015 to $12.6 billion in Q2 of 2016 for MGIC [Press Release: MGIC Investment
Corporation Reports Second Quarter 2016 Results]; and
$8.2 billion in Q2 of 2015 to $11.4 billion in Q2 of 2016 for Genworth. [Press Release: Genworth
Financial Announces Second Quarter 2016 Results]
MOD8_CS2.CFM (3 MIN)
PMI AS THE ALTERNATIVE TO GOVERNMENT-SPONSORED ENTERPRISE CONTROL
Think privatization, or just supporting private enterprise over government enterprise — in this case MGIC
versus government-sponsored enterprises (GSEs) and the Federal Housing Administration (FHA).
The PMI industry is the only alternative to the FHA-provided mortgage insurance premium (MIP) for low-down
payment sales. Presently, mortgage lenders rely on private mortgage insurers to issue coverage since the FHA
only covers a minority (a number which is fortunately dropping) of mortgage originations.
PMI providers’ financial difficulties pose difficulties for getting the government out of the mortgage guarantee
business, an industry abused for three decades to artificially stimulate the economy via housing.
Although low down payment borrowers qualifying for PMI are offered various advantages (such as lower
premium rates) over borrowers covered by the FHA’s MIP, nothing creates a more stable real estate market
than skin in the game. In the long run, borrowers meeting the standard 20% down payment have a higher
stake in homeownership.
More sales volume and fees will be earned in the future with stable 20% down borrowers today. But this is a
tough sell to large media brokers with large branch office operations that need sales today to survive.
Still, government has a stake in private insurers staying in the game.
However, most lenders entirely overlook the fact that Fannie Mae and Freddie Mac are not the only guarantor
of home loans wrestling for a piece of the secondary market: PMI providers have long limited a mortgage
lender’s risk of lending to homeowners.
PMI providers may not have the capacity to insure mortgages at the premium rates lenders hope for, but then
neither did Fannie Mae or Freddie Mac.
As borrowers and lenders alike have learned, abstractedly parceling out more and more mortgages to extend
lending companies beyond their practical limits inevitably results in a backlash. It’s a matter of financial
gravity. Perhaps a private safety net for loans in the secondary mortgage market to cover defaults on riskier
mortgages will cause lenders to be more concerned with conducting business within their means.
The alternative at this point is the perpetuating of ever shakier mortgage investments as was increasingly
allowed by government and designed by Wall Street Bankers during the past 30 years – particularly those last
few leading up to the crash.
We will see how fast the conventional lenders return and whether they played a role in the return of PMI.
These events will become historically important. They are the seedlings which grow into excess mortgage
money, more relaxed conditions and an eventual, and unsustainable, run up in prices. But give it three or four
years to kick in, even if regulations place limits on the risks they all can take without endangering society and
its institutions again.
FUTURE RISKS FOR THE PMI MARKET
In its Q2 2016 results statement, MGIC referenced several risk factors which may impact its future business