Here's a mortgage bailout that's working exactly as intended: Private mortgage insurers are paying out record claims, making up losses incurred by lenders whose loans have gone bad.
Things could have gone even better for the lenders if fewer of them had helped borrowers evade the insurance coverage. Even so, the lenders who were prudent collected $10 billion from policies in the first quarter of 2008 alone, according to The PMI Group, a mortgage insurer. Compare that with the $6 billion the industry lost in all the 1990s, including losses from investments.
"Paying claims as they come due, especially in times of unusual market stress, is exactly the role that mortgage insurers are designed to play, and the industry is meeting its obligations," says Jeff Lubar, a spokesman for Mortgage Insurance Companies of America, an industry group.
Lenders, of course, are glad to have this private safety net. It keeps them in business by allowing them to make more loans to buyers who don't have 20% to put down. But it also makes a huge difference for buyers and sellers in this tightest of credit markets.
- For more on PMI, play the video to the right.
"If there was not a PMI market, there would be few loan products offering smaller-down-payment options," says Joe Jackson, a senior vice president at Wells Fargo Home Mortgage. "This would result in fewer people owning homes, as many could not make a 20% down payment."
Piggybacked into a corner
Although the banks make and collect claims, it's the homeowners who pay the mortgage insurance premiums. Today, lenders would be collecting even more from policies had they not helped borrowers sidestep insurance requirements.Between 2000 and 2006, uninsured mortgages grew from 40% to about 70% of home purchases, according to an industry source. In other words, the number of insured mortgages fell by about half. That's mostly because lenders sold homebuyers packages of "piggyback" loans -- a first mortgage for 80% and another loan, usually a home equity loan, to cover the down payment. This combination was the basis of the infamous "no down payment" or "0% down" loans.
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The lenders reaped multiple sales fees on the loans, and, because they usually resold the mortgages to investors or to Fannie Mae or Freddie Mac, the increased risk apparently didn't deter them. For their part, buyers were eager to spend their borrowed dollars on the price of the house itself, becoming willing accomplices. Piggybacks rose from 20% of all loans in 2001 to about 65% at the top of the boom, in 2006.
Banks have almost entirely stopped offering piggybacks today. But the damage from them continues to drag down the entire economy as the chickens come home to roost.
"The rise in delinquencies and defaults on loan payments may continue for a longer time than expected earlier, leading to increased losses for the mortgage insurers," Zacks Investment Research reported in November.
"Clearly, it's a tough time for anybody associated with the housing industry," says Tom Taggart, a spokesman for The PMI Group.
Recently, more lenders have begun insisting on mortgage insurance: 14.7% of loans were privately insured in 2007, according to the latest statistics, up from 8.5% in 2005. (Many others are backed by the Department of Veterans Affairs or the Federal Housing Administration.) With piggyback loans virtually unavailable today, that figure is doubtless much higher now.
Continued: Who gets the money?
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