Mortgage Insurers May Actually Be A Beneficiary of the QM Rule
The qualified mortgage rule could be a boost for the market share of lender paid mortgage insurance because the premium would not count against the 3% fee cap, one industry executive says.
All MI products are QM compliant, another executive says; it is just how they are applied that will determine whether they fit under the cap.
LPMI is typically paid in a single upfront premium; there is a borrower paid single premium product as well. The MI premium is not collected at the closing table with LPMI; it is rolled into the interest rate of the mortgage and thus it does not count against the 3%, explains Chris Clement, senior vice president of United Guaranty Corp., Greensboro, N.C.
LPMI is a viable option for the right borrowers that lenders need to take advantage of to get the loan, but it needs to be explained properly, he says.
There is a higher interest rate associated with LPMI. But the overall payment is lower if the borrower has a monthly premium product. Basically, an increase in principal and interest is less than the decrease in taxes and insurance.
So the borrower can afford a higher priced home as a result, Clement says.
LPMI is not a blank check. Lenders still must be mindful of the 1.5% average prime offer rate test. But in the vast majority of cases, the increase in the rate due to LPMI will not cause originators to fail the APOR test.
In fact, if the premium caused the rate to breech the test, then LPMI is not the right product for the borrower, he declares.
UG believes originators should have options to offer borrowers. It wants to make it easier for originators to serve their customers while at the same time remaining QM compliant, he says.
LPMI isn't for all borrowers. But many consumers are focused more on the monthly payment versus the annual percentage rate.
Lenders have asked for assistance, going to firms like UG to help them to understand which of their products are QM compliant and why, Clement says. In turn, these discussions helped the mortgage insurer to develop its QM product suite.
The whole MI industry has been good in speaking with lenders about what they do and how MI premiums comply or not comply with the QM rules.
So in its training for loan officers, UG emphasizes to the sales person that he or she is selling the payment, not the APR.
At a webinar UG held on MI and QM in December there were approximately 600 participants.
The company is offering multiple tools for lenders regarding QM in general including ones which allow comparisons to be done, Clement points out. Besides differing private MI types being compared, a comparison can be done with the Federal Housing Administration mortgage insurance offering.
UG does not do consumer training, but as part of its education of loan officers it teaches the sales person to discuss the various options to help the borrower choose the best MI product. Issues like how long the borrower plans to own the house and what is the debt-to-income ratio enter into the discussion on whether LPMI, another single premium product or a monthly premium product, is suitable.
A disadvantage of LPMI is that it is not cancellable, unlike the monthly MI products. Those can be dropped after the borrower pays down the mortgage to a 75% loan-to-value ratio.
UG does not typically release its product volume data. But its single-premium product has been growing in share. LPMI should grow in 2014 because of the QM implications and lender outreach, he says.
Radian Guaranty is the successor to Amerin, the company which developed LPMI.
There is both a single premium and monthly version of this product available from Radian. And because the premium is included in the note rate, it doesn't fall under QM, John Castiello, vice president of secondary marketing, points out.
Radian's sales people are the most proficient at offering this product because of Amerin's role in its creation, he says. But he is not expecting an increase in LPMI share because of QM, at least not a direct increase.
There may be some growth in LPMI because some originators offer a lender credit. It is BPMI but there is an offset on the HUD-1 disclosure.
But the verdict is still out on whether the lender credit has to be included in the 3% fee cap. If it ends up being OK with regulators to keep doing the offset, then there will not be a LPMI share increase, he believes.
What might go away is BPMI single premium, at least until the Consumer Financial Protection Bureau determines what it means by pro rata.
LPMI is a function of where interest rates are. If there is no interest rate buy up and there is not enough secondary market premium pricing for the loan to cover the single MI premium payment, LPMI is not an effective product.
"But I don't think there is any more lender paid than we already do," he says. Radian did 20% of its 2Q13 business in LPMI, it previously said.
The company reduced its BPMI monthly premiums by five basis points across the board, which made this product a more attractive option in the marketplace and other MIs followed, Castiello notes.
There is an option called "deferred monthly." The premium is not collected at the closing table, and as noted above, that means it does not get included in the 3% point and fee cap.
"That is the perfect QM product," he declares.
Dodd-Frank does allow for the exclusion of up to 175 bps of a BPMI single premium from the 3%, as long as the premium is refundable on a pro rata basis if the policy is cancelled. The 175 bp is the same as the FHA upfront premium (which is excluded from the cap), he points out.
Originators should not get hung up on refundability. Every MI product fits under QM. The only thing lenders have to think about is does the product being used fit under the cap, Castiello declares.