Mae to relax PMI requirements,
saving home buyers money
Low down payment mortgages already are easy to
get. Now they'll be a little bit cheaper, too.
Mae said that, starting in March, it will let the lenders it
works with require less private mortgage insurance on some low-down
The relaxed restrictions mean borrowers who
take out 30-year, fixed-rate mortgages stand to save $10 to $30
a month, or more than $2,000 total.
"We can begin offering home buyers the best
of both worlds -- lower down payments and new options to lower their
mortgage insurance costs," Franklin Raines, Fannie Mae's newly appointed
chief executive officer, said in a Jan. 15 speech announcing the
lenders from default
Known colloquially as "PMI," private mortgage insurance protects
mortgage lenders against low-down payment borrowers who default
on home loans by providing a way for mortgage companies to recoup
the costs of foreclosure. Home buyers pay for the coverage in monthly
"This is good news for consumers," Raines added
in his remarks at the National
Association of Home Builders conference. "While U.S. homeownership
rates have reached record levels today, we can -- and should --
extend this dream to more families."
For people new to home buying, it's difficult
to understand that lenders often don't set their own rules when
it comes to doling out mortgage money. That's because they usually
turn to Fannie Mae and Freddie
Mac -- the company's sister agency -- as a source of money to
The process works like this: Borrower "A" wants
to get his own place. The local bank wants to lend him the money
and make more money off the interest. But the company doesn't want
to get stuck holding the bag if interest rates rise, which could
leave it collecting 7 percent on a mortgage but paying out even
more to depositors from whom it gets the money.
Selling to Wall
Enter Fannie Mae and Freddie Mac. They buy home loans, package them
together and sell them to Wall Street investors as securities that
yield, say, 6.5 percent on a bundle of 7 percent mortgages. By selling
loans this way, a bank gives up some of the interest it would have
collected but insures itself against the aforementioned danger of
climbing rates. The agency and lender each collect 0.25 percent
for their work, and the borrower starts worrying about more important
things, like new window treatments.
In order to get Fannie Mae and Freddie Mac to
play ball, however, lenders have to follow certain guidelines when
making their loans -- neither agency wants to buy a bunch of mortgages
that will turn sour.
Historically, that meant Fannie Mae would buy
mortgages where a borrower paid just 5 percent down only if 30 percent
of the loan balance was covered by private mortgage insurance. The
agency felt that level of coverage allowed people to get into homes
without a lot of money up front, while also adequately protecting
Popular anger over PMI requirements simmered
among borrowers and industry types, though, because the increase
in monthly payments caused by added PMI premiums kept some people
out of the loan market. Plus, consumers don't benefit from PMI policies
the way they do from car insurance in the event of a wreck; should
they go into default, lenders -- not homeowners -- are the ones
Recently, the frustration boiled over, turning anger into action.
In July, President Clinton signed legislation that makes
it easier for borrowers to cancel PMI once they pay their mortgages
down to a certain level. And during an October speech, Fannie Mae's
outgoing chief executive, James Johnson, made it clear the agency
was interested in finding ways to lower the cost of insurance for
The net result is this year's initiative. Beginning
six or seven weeks from now, lenders who use Fannie Mae's Desktop
Underwriter computer system to make loans will be able to insure
a smaller part of their 30-year fixed mortgages. Officials say the
so-called "DU" system makes it easier to spot financially troubled
borrowers, allowing them to reduce the coverage level without increasing
their exposure to risk.
Fannie Mae financed about a quarter of the mortgages
originated last year, with about 2 million of those loans processed
through DU, according to spokesman Gene Eisman. The agency expects
about 150,000 home buyers to take advantage of the reduced insurance
program this year.
On loans for 95 percent of a home's appraised
value, known as "95 percent loan-to-value" mortgages, the agency
will require only 25 percent of the loan be covered, rather than
30 percent. For 90 percent loan-to-value mortgages, the required
coverage level will drop to 17 percent from 25 percent.
That means the monthly premium on a $100,000
mortgage made at 95 percent loan-to-value with a 7 percent rate
would fall to $56 from $65, according to Fannie Mae estimates. Since
PMI likely would be in place until the borrower reached 22 percent
equity -- a process that would take 142 months with no prepayments
-- overall savings would come to $1,302.
Borrowers also will have the option of paying
a portion of their loan amount up front or accepting a slightly
higher mortgage rate to reduce their monthly insurance costs even
more. By paying three-quarters of a percentage point, or 0.0075
of their loan, for instance, the sample borrower above could shrink
the premium to $40 a month. That would save $2,800 until PMI could
be canceled, after subtracting the $750 cost of the move.
"The reduced MI should translate into lower insurance costs for
the consumer," says Frank Filipps, chief executive officer of CMAC
Investment Corp., a mortgage insurer based in Philadelphia.
"From their perspective, that should be positive, allowing, on the
margin, more consumers to be able to qualify for a mortgage."
Lenders plan to drill that message home, too,
according to Michael Prach, executive vice president of East/West
Mortgage Co., based in Peabody, Mass.
"We'll use it to our advantage and be able to
offer it to our clients out there," says Prach, whose company originates
loans in a handful of New England states. "We're here to try to
get the best programs for our clients, period, and if this only
enhances or increases that, then great."
Prach says he also sees more opportunities for
low-down payment borrowers if Fannie Mae is satisfied with the results
of the 30-year loan program and expands it to other types of mortgages.
"We expect, over time, as we've kind of seen
the whole industry change and open up, they'll be less restrictive,"
Prach says. Among mortgage insurers, "there is some resistance out
there, but they know if they don't jump on board and participate
with it, they're going to lose the whole kit and caboodle."
As far as Freddie Mac is concerned, similar
measures probably will be announced over the next 30 to 60 days,
says spokeswoman Sharon McHale. The agency attempted to garner
approval from Congress last fall to develop alternatives, with its
lenders, to mortgage insurance, but the efforts were blocked. This
time around, Freddie Mac plans to reduce insurance costs with a
more conventional approach.
"That's the direction we're heading in if those
kinds of structures benefit the borrower, which is our mission,"
McHale says. "We just don't have clarity now around exactly what
it is we're going to do, but I think it's pretty clear we're continuing
to head in the same direction as Fannie."