BILL MULLIN
‘Successful’ effort
A mortgage loan safety feature developed to protect lenders, but recently avoided by borrowers as too costly and of no benefit to them, could actually make better financial sense than the second-mortgage alternative they’re more likely to seek.
That’s according to NE Moves President Bill Mullin, who says that while second mortgages had gained favor among homebuyers who had less than 20 percent of a home purchase price for a down payment, they’ve become more expensive.
Private mortgage insurance, the other alternative for such borrowers, is re-emerging as the mantra by which many of his originators live, Mullin said.
“For almost two years now we have been actively promoting the use of two products,” Mullin wrote in a memo to his staff late last month. “[They are] a return to private mortgage insurance as a financing tool and the increased usage of [state housing agency loans].
“This effort has already been very successful and will stand us in great stead for 2007,” he wrote.
Mortgage insurance, first developed in 1957, became popular among lenders of mortgages that allow borrowers to put down less than 20 percent of the purchase price of their home. Lenders see such borrowers as higher risks. If the borrower defaults, the insurance will pay the lender for some percentage of the loan.
When a loan is both offered and insured by MassHousing, a quasi-state agency whose products are directed at low-income buyers, and which created its own insurance product since 2004, they default at half the state’s current overall rate of 0.5 percent, that agency says.
MassHousing’s MI-Plus insurance product is now a required feature on all of its loans on which borrowers put down less than 20 percent. It is also offered on some loans made by other lenders who have insurance agreements with the agency. It includes the relatively rare benefit of covering mortgage payments for a borrower if a borrower becomes unemployed.
State-backed insurance, unlike private insurers, pays monthly mortgage costs of up to $2,000, for up to six months, during the first 10 years of the loan if the borrower loses his or her job.
Ready to Step Up
Private companies Mortgage Guaranty Insurance Corp. (MGIC) and Genworth Mortgage Insurance also offer an unemployment benefit, but only during the first five years of the loan, while most mortgage delinquencies happen between the fourth and eighth years, according to MassHousing Director of Corporate Communications Eric W. Gedstad.
NE Moves, one of a number of approved MassHousing lenders and one of its highest-producing lenders, started promoting mortgage insurance in conjunction with state agency loans the same year MassHousing began offering MI-Plus. Mullin said his company had already begun looking at some of the more “exotic” loans more critically.
“We said to ourselves, ‘that’s not real,'” he recalled. “We thought there was a smarter, more traditional way.”
Gedstad said MassHousing offers MI-Plus because paying someone’s mortgage temporarily prevents some defaults and foreclosures, which are costly for the lender.
“The product is designed to pay for itself if we can save one borrower from foreclosure by paying 10 full MI-Plus claims,” he said.
Simple math proves mortgage insurance makes more financial sense to most borrowers than a second mortgage for a smaller percent of the loan – a strategy many borrowers with less than 20 percent to put down have been steered toward to avoid PMI, according to Mullin.
In his example, a typical first-time homebuyer who has $26,000 to put down would face a $234,000 mortgage on a $260,000 home. The monthly mortgage insurance cost for such a buyer would be $101, if she had average credit. With that payment, plus $1,441 per month on a 30-year fixed-rate mortgage at 6.25 percent, total monthly payments on the $234,000 loan would be $1,542.
If the buyer chose the second-mortgage route, she would put down $26,000 and pay $182 per month on a $26,000 mortgage loan at today’s average second-mortgage rate of about 7.5 percent, Mullin said. That would be on top of $1,281 per month on the remaining $208,000 of the loan and therefore would equal $1,463 in monthly payments.
A second mortgage initially appears to be the cheaper route, but mortgage insurance can be dropped once a borrower owns 20 percent equity in his or her home – which wouldn’t take more than three or four years in the current market for people who make timely payments, Mullin said.
Monthly payments made after the mortgage insurance is dropped, in the above scenario, would be only $1,441 for the remainder of the loan.
MassHousing’s typical MI-Plus program premium on its average insured loan of $200,000 is $103 per month, although the agency, based at 1 Beacon St. in Boston, also offers a 20 percent discount on the premium to borrowers earning less than 80 percent of the area median income.
Mortgage insurance is also deductible from federal taxes for the first time this year, Mullin noted – an added incentive to borrowers.
And, he suggested, having a predictable monthly payment is a better idea for many buyers than a second mortgage, which often carries higher rates that may go up.
Last year, just half of NE Moves’ borrowers had more than 20 percent to put down toward their purchase loans – leaving a huge market of the other half who needed insurance or some other solution to make the underwriting work, Mullin said.
Of all NE Moves’ purchase-money borrowers making a down payment of less than 20 percent on a home purchase, 54 percent still choose the second mortgage option, and 46 percent the mortgage insurance option, he said – but the balance is shifting.
Last year, 10 percent chose an insured MassHousing loan and 13 percent selected a privately insured loan. But the privately insured loans rose from 11.7 percent of all NE Moves’ closed loans in 2005 to 13 percent last year, he noted in the memo to his staff.
“This, as you know, is a product that lenders are comfortable with Â… incidentally, [it] was almost four times our subprime market.”
Insured loans may not be quite as easy on the front end, Mullin said, but he thinks they’re about getting back to the basics.
“People probably should have been paying attention to some of the more traditional products out there,” he said. “I don’t think lenders or borrowers were taking as much advantage [of some of them as they could have].”
