Keys Homes
Sunday, March 17, 2013
Because the system works, that's why

By Regina Corcoran Citizen Columnist

Have you ever wondered, as a result of the mortgage debacle, what happened to the mortgage insurance companies?

There were no headlines. No reports of private mortgage insurance companies dropping like flies. No mortgage insurance company bailouts. No PMI restructuring. No new federal legislation adding 10 lbs. of paper to the loan application process.

Private mortgage insurance allowed borrowers to buy a home with only 5 percent down. In exchange for the premium paid by the borrowers, the PMI companies covered lenders against losses due to foreclosure.

Wow. When the sky was falling, they must have lost their shirts.

Place the left thumb to the left side of the forehead. Right thumb to the right side of the forehead. Point the four fingers on each hand straight forward. Now, wave them up and down while saying, "nanner nanner nanner!"

The MI's did not implode like so many banks and mortgage companies. Guess why? Because they didn't do stupid stuff, that's why.

Leading up to 2005, mortgage insurance was hot. Even as early as the 1950's, the one stumbling block for those wanting to own a home was the down payment. PMI supplied the solution.

When even starter home, townhome and condo prices in the Keys exceeded one half million dollars, PMI made it possible for first time home buyers to purchase with only a 5 percent cash down payment.

BUT, they had to prove that they had good credit, their own cash to close the deal, and sufficient income. As 2005 approached, mortgage insurance companies would approve borrowers using 45 percent of their income for their housing and all other debts.

Starting in 2005, insanity began to take over. The stated income loans, characterized as liar loans, those option ARM's that consumers never fully understood, and the stacking loans (80 percent first mortgage and 20 percent second mortgage) broke out like a rash.

Let's not forget the cash out refinance either. Home owners were refinancing, sometimes annually. You'd think their houses were expelling chips like a one-armed bandit in Las Vegas.

At the opposite end of the spectrum were the banks, lenders and investors. They were busy selling dubious securities and inventing words like tranches.

The PMI's, surely a cousin to Rudolph, never played in these reindeer games (sorry, Easter bunny). They were required to maintain adequate capital to cover losses in the event of a debacle.

I'm sure the mortgage crisis hurt them, but they recovered with a bandage, not a trip to an emergency room to stop the hemorrhaging.

The 80/20 loan was, no doubt the invention of some people scratching their heads, saying, "how can we do what the MI's won't let us do?" Mortgage insurance companies provided no coverage against losses on these types of loans.

Getting PMI on the option ARM's was equally unheard of.

Also, when those borrowers were withdrawing cash (kerching kerching) out of their homes, the loan to value ratios were generally 80 percent or less and did not require mortgage insurance.

So, mortgage insurance still exists. For example, a person buying a $300,000 home, may purchase it with 5 percent or $15,000 down. The PMI adds approximately $171 to the payment or about .75 percent to the interest rate.

Borrowers with 10 percent down may pay as little as $121.50 for the mortgage insurance or about .55 percent additional on the rate.

What do you think?

Regina E. Corcoran, SRA, is a Florida real estate broker, state-certified residential appraiser and residential contractor. She is president of AmeriRealty Corp. and vice president of AmeriMortgage Corp. She can be reached at ReginaECorcoran@cs.com. Corcoran writes her column exclusively for The Citizen. It appears every other Sunday.

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