A new mortgage insurance premium structure the Federal Housing Administration is slated to implement in October could open the door for private mortgage insurers to recapture lost market share from the government.
But it appears the nation's seven active PMI firms will first have to make changes before taking advantage of the opportunity.
New Home Mortgage Disclosure Act figures show that tighter underwriting standards and pricing policies adopted by the MIs "may have contributed to the dearth of conventional high-LTV loans with PMI in 2009," according to Federal Reserve Board researchers.
On Oct. 4, the FHA will reduce its upfront premium to 100 basis points. At the same time, the FHA 55 bp annual premium will be increased to 85 bps for mortgages with loan-to-value ratios up to and including 95%, and to 90 bps for LTVs above 95%.
The new premium structure will bring the FHA "more in line with private mortgage insurers' pricing and will facilitate the return of private capital to the mortgage market," said FHA commissioner David Stevens. "We have actually made GSE loans with private mortgage insurance a better option for some homebuyers."
In its analysis of the 2009 HMDA data, Fed researchers noted that the PMI companies have been under extreme stress, suffering billions of dollars in losses. Private insurers denied 12% of applications in 2009, compared to just 2% during the housing boom.
In addition, the government-sponsored enterprises—Fannie Mae and Freddie Mac—increased their loan fees for borrowers with low credit scores and high LTV loans.
The Fed's analysis shows that loans with LTVs above 95% were generally ineligible for purchase by the GSEs in 2008 and 2009.
GSE pricing also made Department of Veterans Affairs and FHA guaranteed loans more attractive for borrowers with relatively low credit scores and LTVs between 80% and 95%, "regardless of PMI pricing and underwriting policies."
But PMI pricing and underwriting policies acted as a deterrent for borrowers with moderately high credit scores and LTVs just above 90% and below 95%.
In that range, the vast majority of HMDA-reported loans are FHA or VA loans "despite the GSEs' favorable pricing for these loans," the Fed researchers said.
"PMI pricing and underwriting become more favorable at [the 90% LTV] threshold, causing the sharp shift away from government programs and into the conventional market," the Fed analysis says.
"Another downward spike" in the FHA/VA market share occurs at the 85% LTV threshold.
The 83-page analysis of the 2009 HMDA data is on the Federal Reserve Board's website.
