The End of 100%

In the ever changing landscape of lending, we had the latest and most significant change take place this past Monday. All of the Private Mortgage Insurance Companies announced that they would no longer issue mortgage insurance on any loan with a loan to value greater than 97%. On a side note I can remember when we could only do a 97% loan and then just one of the mortgage insurance companies said they would insure up to 100% and it was months before the others joined in when the LTV was going up, but now that the maximum LTV is going down, they are all are the same page and quick to make the move. Kind of like rats jumping off a sinking ship! But I digress! Now there are few instances that one of the companies will honor the 100% commitment but it is in such a limited scope that you have a better chance of winning tonight’s Powerball drawing than getting a 100% loan.

So why are they doing this? First of all they are all taking a bath financially in mortgage insurance claims on loans that are in default and foreclosure due to the current mortgage crisis. Some would argue that they have been making money hand over fist for years as their losses have been limited as the housing prices grew and mortgage rates were declining or low, but keep in mind that during that time that they had to fight to keep market share and revenues as the banks created the second mortgages that would go to 100% and in the industry it was common practice to do a first mortgage for 80% and the second for the remaining amount to avoid mortgage insurance. So let’s not rush to judgment on the profits of the mortgage insurance companies over the last 7 years. Secondly and more importantly, we are seeing house values in some areas decline. So if they did insure a loan that was a 100% loan in one of those areas and the house price has declined, they are now insuring for over 100% of the value of the house. How smart is that?

What does this leave us? Thanks to the stimulus package that was passed we know have higher FHA loan limits and in most cases the cost of the monthly mortgage insurance will be less on an FHA loan. Also, in the old days, before 100% financing, we did most loans using gifts, tax returns, SAVINGS, as a way to come up with the initial 3% for a down payment. Imagine that, you have to save some money to buy a house?

I will write more on the increase in the FHA loan limits and the opportunities that are presented by this later this week. For questions or comments on this please contact Chris Scheer at cscheer@cornerstonestl.com or 314.223.9824.