Private mortgage insurers saw demand hit a low for the year in July, with applications falling 4.6 percent from the previous month and 52 percent from a year ago, an industry group said. Meanwhile, FHA loan guarantees are grabbing more market share.

The 86,734 applications received by private mortgage insurers in July continues a downward slide that began in the spring. Private mortgage insurance applications hit a high for 2008 in March, with 160,139 received, according to the Mortgage Insurance Companies of America.

MICA reported the dollar volume of primary new insurance written on newly originated conventional mortgage loans totaled $12.3 billion in July, also a low for the year. The group said 70,725 borrowers used private mortgage insurance to buy or refinance a home in July, a 59.3 percent decline from a 12-month high of 173,949 policies written in October.

Mortgage insurance is typically required by lenders when borrowers make down payments of less than 20 percent of a home’s purchase price, or refinance a home they have little equity in.

Private mortgage insurers, who saw business boom in 2007 when "piggyback" second mortgages fell out of favor with lenders, are facing mounting losses, especially on loans in which borrowers made down payments of less than 5 percent (see story). A shortage of capital forced one major private mortgage insurer, Triad Guaranty Insurance Corp., to stop writing new policies altogether in June.

But private mortgage insurers are also losing market share to the Federal Housing Administration, which has seen a dramatic rise in demand for its loan guarantees thanks to higher loan limits and relatively low down-payment requirements. HUD reports that in May, FHA was guaranteeing purchase loans at the rate of 818,000 a year — a nearly 15 percent share of the market. That compares with 289,000 purchase loan guaranteed in 2007, or 4 percent of the market.

FHA is also guaranteeing more loan refinancings, thanks in part to the FHASecure program targeted at helping troubled borrowers refinance out of adjustable-rate mortgage (ARM) loans. HUD says more than 325,000 borrowers have taken advantage of the program since it was created in August 2007, and that FHASecure refinancings could hit 500,000 by the end of the year.

The Housing and Economic Recovery Act of 2008, signed into law in July (see story), authorizes FHA to refinance an additional $300 billion in loans through the new Hope for Homeowners program. That program, which kicks off Oct. 1 and is not confined to ARM loans, requires lenders to agree to write down some of a loan’s principal. Participating borrowers must also agree to share future profits from the sale of their home with the government.

The Housing and Economic Recovery Act also raised minimum down-payment requirements on FHA-guaranteed loans to 3.5 percent, and will put an end to the use of seller-funded down-payment assistance programs on Oct. 1. But FHA is expected to remain popular with borrowers, as private mortgage insurers are no longer backing zero-down loans and have boosted minimum down payments in declining markets to 5 percent or 10 percent, depending on applicants’ credit scores (see story).

The latest numbers from MICA suggest that private mortgage insurers are still being punished for loans they insured using looser underwriting standards. Defaults hit 68,831 in July, up 1.4 percent from the previous month and 33.7 percent from a year ago. Insurers reported 39,229 "cures" in July, for a cure rate of 57 percent — down from 63.6 percent in June and a 12-month high of 87 percent in March. Loans are said to be cured when borrowers default but insurers don’t have to pay a claim, because the borrower becomes current again.

Private mortgage insurance may be a better deal for some borrowers, and is the only option for some seeking large loans.

Although a temporary increase allowing FHA to guarantee loans of up to $729,750 in high-cost markets will expire Jan. 1, the new maximum of $625,500 for 2009 is still far above the $372,790 limit in place in 2007. FHA will also continue to be able to guarantee loans of up to $271,050 in normal markets in 2009, compared with a floor of $200,160 in 2007.

HUD implemented risk-based pricing for FHA loan guarantee programs in July, and is currently charging borrowers with good credit less than those with lower scores. Although HUD maintains a risk-based pricing system is more fair than a one-size-fits-all approach, Congress has ordered HUD to suspend the system for one year. HUD will revert to a one-size-fits-all approach on Oct. 1, charging all borrowers slightly more than it did before the risk-based pricing was introduced on July 14 (see story).


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