Tighter Mortgage Insurance Standards
Mortgage insurers have been reeling from the record number of claims due to the rising foreclosure rates in the wake of the subprime collapse. Unfortunately for them, the worst is yet to come claim’s Fitch Ratings.
“The mortgage insurance industry’s troubles are not over and may, in fact, get worse,” Fitch said in a report today. The industry “underestimated both the scope and severity of the decline in residential mortgage markets that became increasingly acute in 2007.”
About a third of the industry’s total coverage outstanding is for 2007 mortgages, and homebuyers borrowed at least 95 percent of the property’s value on most of those loans, according to Fitch. Borrowers with prime credit scores became delinquent in their first year on 2007 loans at more than twice the rate of their peers who took out mortgages in 2006.
Like the banks that offered the loans, the insurers also had lax standards as business exploded in growth when private mortgage insurance became more competitive with tax law changes. Now the insurers are paying the price because unlike banks they couldn’t spread their risk around in a secondary markets as with mortgage securitization.
Now we are seeing the flip side, much tighter underwriting standards. Many of the homebuyers who qualified for insurance in the previous two years would be unable to purchase polices under current conditions.
With banks also tightening their lending standards, you won’t see as many so called “piggy back” loans where buyers don’t have the standard 20% down payment. So, that means banks will then require more prospective borrowers to purchase Private mortgage insurance or PMI as it is better known as.
While the tighter underwriting standards are obviously a smart move on insurers’ part, it’s also another reason why a quick turnaround in the housing market is becoming less and less likely.
