Mortgage insurance developed in the 1950’s to protect the lender and reduce the down payment required from the borrower. The product very likely developed in response to the Veterans Guaranty Program that guaranteed 20 percent value of the loan and reduced the down payment required from veterans. It leveled the playing field to non-service members. By insuring a portion of the loan and paying a premium on the value the large down payments could be eliminated.
Mortgage insurance is not required if the first mortgage has loan to value 80 percent or less. Buyers were once required to make 20 percent down payments in order to protect the lenders if the value of the property declined. Premiums were roughly .4 percent of the loan. While the cost was usually borne by the borrower, the Lender can also request mortgage insurance and pay the premiums.
The creative loans left lenders exposed and did not put premiums into the pockets of mortgage insurance companies. Creative financing terms for these products are blended, piggyback mortgages, simultaneous loan closings, split loans, 80-10-10, and 80-5-15. A buyer could use two or more loans to purchase property. The first mortgage was at less than 80 percent of the purchase value and a second mortgage (10 to 15 percent) was used for the purchase of the property. The down payment from the buyer was as little as 5 percent. In some cases home equity lines of credit (HELOC) were also included at the closing table and the buyer could leave the table with 25 percent of the value of the purchase available for home improvements or personal use.
The collective loss of revenue to MICA’s member companies was evident after an end run by-passed the requirement for mortgage insurance. There was serious lobbying on Capitol Hill by Mortgage Insurance Companies of America (MICA) to make premiums paid for mortgage insurance tax deductible. MICA represents the interest of companies that issue mortgage insurance. Of the seven predominant companies that insure mortgages, six are members of MICA.
MGIC Investment Corp. (NYSE:MTG)
Radian Group Inc. (NYSE:RDN)
The PMI Group, Inc. (NYSE:PMI)
American International Group, Inc. (NYSE:AIG)
Old Republic International Corp. (NYSE:ORI)
Genworth Financial, Inc. (NYSE:GNW)
Triad Guaranty Insurance (NASDAQ:TGIC)
Amerin Guaranty Corporation (see Radian)
Republic Mortgage Insurance Co. (see Old Republic)
G.E. Capital Mortgage Insurance Corporation (General Electric Credit Corporation, General Electric)
PMI payments to a qualified mortgage insurance company will be tax deductible in 2007 to taxpayers that itemize their taxes. Of course there is a catch. In order to be eligible the mortgage must originate in 2007, all borrowers will not qualify (targeted for low income), and is only effective for 2007 unless extended.
Many lenders are offering to refinance borrowers with adjustable rate mortgages (ARMs) into safer fixed rate mortgages before the rates adjust and the mortgage goes into default. Claiming the premiums for mortgage insurance are tax deductible, may pull the wool over the borrowers eyes. The income ceiling for qualification and one year effectiveness may pull the carpet from under them.
As more insurance claims are filed and paid, mortgage insurance providers will have less earnings. Expect MICA to petition for higher mortgage insurance premiums in the future to mitigate loss and restructuring by the mortgage insurance companies to reduce operating expenses.
MGIC and Radian have a pending merger via stock exchange. The two companies took a combined loss of roughly $1 billion on their shared company C-Bass.
AIG product information includes insurance for subordinate mortgage products. Some of these include second mortgages and HELOCs.
The mortgage insurance companies may be hard hit by default claims. Especially following lost revenue from premiums due to creative mortgages.