Since buying my home in 2006, I received over 100 solicitations for private mortgage insurance (PMI), a policy that promises to repay a percentage of my primary loan if I default (because of disability, unemployment or any reason). Besides luring borrowers into paying additional money, PMI is required by some lenders when a down payment is less than a certain percent. Recently the number of borrowers defaulting on their loans rose greatly. As a result, some mortgage insures reported huge fourth quarter losses. Consequently mortgage insurers r tightened underwriting standards in response.
The good news: the mortgage insurers are not going bust. Unfortunately the bad news is two-fold:
- Because mortgage insurers tightened underwriting standards, buyers with low down payments have a harder time qualifying for loans. Result: fewer buyers qualify.
- More claims means less insurance capital, and less money means less future policies. Result: fewer buyers qualify.
As fewer buyers qualify, the buyer pool shrinks. As the buyer pool shrinks, demand decreases and prices usually drop. And so the housing market takes another hit.
How is our local market impacted?
Because the cost of ownership is so high in our area, many local buyers purchase with lower down payments. Twenty percent down on a $900,000 home is $180,000 (which doesn’t include closing costs). That’s a lot of cash! So far none of my clients had problems qualifying for loans because of PMI. Still, I assume some local buyers are impacted. The good news: there is a wide array of mortgage loans. While one lender requires PMI on 10% down, another requires it on 5%. In my opinion, these changes ultimately impact the market 3-6 months from now. In the meantime, much of the Peninsula still records flat or positive appreciation.
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