The private mortgage insurance industry (PMI) is no longer boycotting California.  Some of the largest private insurers in the nation, including PMI, Genworth and MGIC, have returned to the California market after abandoning the state following the housing bubble implosion.

PMI has lowered the requirements for conforming loan amounts in California to the following criteria:

  • 700 minimum credit score;
  • 45% maximum debt-to-income (DTI) ratio; and
  • 90% maximum loan-to-value (LTV) ratio on single family residence (SFR) properties and condos.

For an individual with a 700 credit score taking out a conforming 30-year fixed rate loan at 90% LTV on the purchase of a SFR to be used as a primary residence, PMI is charging a 0.56% monthly premium for losses up to 25% coverage (the Fannie Mae/Freddie Mac standard requirement for that 30-year fixed rate mortgage).

Genworth is stepping back into California as well, increasing the allowable LTV to 95% for purchases with a minimum 680 credit score. For an individual with a 700 credit score taking out a conforming 30-year fixed rate loan at 90% LTV on the purchase of a SFR to be used as a primary residence, Genworth is charging a 0.62% monthly premium for 25% coverage.

MGIC has broken California up into two separate tiers, with the better-performing counties (Orange, Marin, San Diego and San Francisco among them) given less stringent eligibility requirements, with minimum credit scores of 700 and maximum LTVs of 95%. Borrowers in the remaining parts of the state (the second tier) are required to have at least 720 credit scores with a maximum LTV of 90%.  For a borrower in the second tier with a 700 credit score taking out a conforming 30-year fixed rate loan at 90% LTV on the purchase of a SFR to be used as a primary residence, MGIC is charging a 0.62% monthly premium for 25% coverage.

Meanwhile, the Federal Housing Administration (FHA), which has taken an increasingly larger chunk of the mortgage market in California and nationwide, recently upped the down payment requirement to 10% for borrowers with credit scores below 580, and will reduce the allowable seller concessions to 3% of the loan amount from the 6% allowed previously. The up-front mortgage insurance premium has been raised from 1.75% to 2.25%, and the FHA is in the process of requesting an increase in the maximum monthly insurance fee to as high as 1.55%; the current insurance premium charged monthly is 0.55%.

first tuesday take: FHA-insured loans usually have more stringent underwriting procedures and higher interest rates than conventional loans (which are insured by private mortgage insurers), but they have lower credit score thresholds. Until these private insurers made their return to California, FHA loans were the only way to get into a home with less than 20% down.

With the proposed change to FHA monthly premiums, it may just be time for a borrower with less than 20% down to start shopping for rates if he has the credit score to do so, especially in light of the up-front premium to be paid to FHA which is generally not required with private mortgage insurers.

Like much else in the real estate industry, the insurers follow the money. It might be coming at a good time, as far as FHA is concerned — guaranteeing nearly 30% of the nation’s mortgages and watching the default rate tick upwards may be more than its coffers can take. We are making no wagers on the sales volume in the coming months, or whether volume will be stimulated by PMI carriers or inhibited by FHA.  However, it’s a sure bet that the doors have been opened for conventional lenders to return to California, and that bodes well for normalizing the market.

We will see how fast the conventional lenders return and whether they played a role in the return of PMI.  These events will become historically important. They are the seedlings which grow into excess mortgage money, more relaxed conditions and an eventual run up in prices unsustainable under the rush of the financial accelerator. But give it three or four years to kick in, even if regulations place limits on the risks they all can take without endangering society and its institutions again. [For more information on the financial accelerator phenomenon, see the May 2010 first tuesday article, Cleaning up after the ruptured housing bubble.]

Re: “Private mortgage insurance companies return to market” from the Los Angeles Times, PMI Mortgage Insurance Co. website, Genworth’s Mortgage Insurance website, MGIC Mortgage Insurance Rates