Several weeks ago we featured Part One of an article on
Private Mortgage
Insurance (
PMI) and the relatively recent twist called
a
Piggyback Mortgage which allow a borrower
to
eliminate PMI. You may have noticed
that the follow-up articles have not appeared.
If you were waiting breathlessly (sure you were), our apologies. There was
a computer glitch that caused some of the delay, but much of the time went into
more research into PMI.
Information on this type of insurance is surprisingly limited. A computer search
turns up thousands of results, but very few of the dozens of websites we looked
at went beyond explaining when and why PMI is required. We were particularly
interested in how PMI rates (premiums) were handled over the life of the loan
' whether they declined with the loan balance or if there were periodic
increases or decreases that reflected underlying economic factors. The mortgage
loan officers to whom we spoke admitted they had long wondered about some of
these things themselves but had no clear idea how the process worked.
Finally we contacted AIG United Guaranty, a private mortgage insurer. When
we finally reached the correct department (three regional offices, corporate
headquarters, and seven very nice people later) my several questions brought
them to a dead stop. Apparently no one had ever asked about such things before.
However, the public affairs spokeswoman was no quitter and she was able, after
some delay, to obtain answers to each of my questions from the corporation's
Vice President of Claims. These answers, of course, pertain only to United Guaranty,
but other companies probably follow essentially similar rules. Because the answers
are complicated and we certainly don't wish to misrepresent United Guarantee,
we are quoting them verbatim. Also, this was an email exchange so there may
be some duplication among questions and answers.
MortgageNewsDaily: Do new premiums fluctuate over time? If
so, are they tied to interest rates and if not, what are the underlying factors?
United Guarantee: Actually, the majority of mortgage insurance
premiums stay the same for years one through ten of the loan and then reduce
to an annualized rate of .20 basis points (times the loan amount and then divided
by 12 for a monthly amount.) Premiums that do not reduce are described in the
next answer.
This would be the only fluctuation (reduction) in the mortgage insurance premiums
which is not tied to interest rates. The total monthly loan payment itself may
change if the loan is an adjustable rate mortgage, but the mortgage insurance
premium would remain a constant within that payment. (A financed MI premium
would not show up in the monthly mortgage payment as that premium would then
become a part of the total amount borrowed.)
AIG United Guaranty and other mortgage insurers have, in recent years, filed
additional rates for riskier loans including A-minus loans and loans that feature
limited documentation. These new programs ' which feature higher premium
factors ' could lead to the perception that premiums fluctuate, but in
most cases, our premiums have remained constant over many years.
One last thought: a refinance resulting in a higher loan balance due to cash
out would lead to a higher MI premium if the borrower opts to borrow enough
to make MI necessary (less than 20 percent equity in the home.)
MortgageNewsDaily: Once a borrower is covered under a PMI
policy, is his premium fixed for the duration of the policy even as the loan
balance is declining and even if premiums on new policies increase or decline?
United Guarantee: Yes. The premium is fixed for that particular
loan, even if the loan balance declines, but it will drop in year 11 to .20
basis points (see my answer in Question 1 above.) Nearly all of our MI renewals
are based on the original loan balance and a not a declining one. For those
based on a declining loan balance, there is no reduction in premiums in year
11 as described in my first answer.
We admitted to confusion as to how a payoff on a claim is calculated and it
is considerably more nuanced than we had thought, tied to the amount of coverage
the lender demands that the borrower pay for. United Guarantee stated:
Our payment (to the lender) is not based on the difference in required versus
actual down payment. If a lender specifies, for example, 25 percent "coverage"
for the loan, we pay 25 percent of the total amount outstanding on the loan
(principal balance plus other costs accumulated when the lender/servicer forecloses,
as illustrated below:
| Original purchase price: |
$150,000 |
| Original loan (10% down - $15,000) |
135,000 |
|
|
| Principal balance at default |
127,600 |
| Accumulated interest |
9,800 |
|
|
| Attorney's fees |
2,000 |
| Property taxes |
1,140 |
| Hazard Insurance |
800 |
| Property preservation expenses |
1,000 |
| Statutory disbursements |
1,500 |
| ''''Subtotal |
$143,840 |
|
|
| ' |
|
| Less escrow balances |
1,100 |
|
|
| ' |
|
| Total claim |
$142,740 |
| ' |
' |
| Coverage on policy is 25 percent |
' |
| So claim payment is (25% x $142,740) |
$ 35,685 |
So you see this claim payment is considerably higher than the extra $15,000
required to reach a 20% down payment in the original purchase. We cover more
than just that "gap."
In the next article we will take a look at the numbers involved in PMI vs. piggy
back mortgages and at some of the claims PMI insurers are making about the risks
inherent in choosing their competition.