WALNUT CREEK, Calif. – Feb. 14, 2008 – The second-largest U.S. mortgage insurer announced Monday it would no longer insure homebuyers with less than 10 percent down in California and other “distressed markets” to protect the company from a tsunami of anticipated losses in the housing market.
PMI Group Inc., a Walnut Creek-based corporation, reported it would end underwriting mortgage insurance for those buying homes with less than 10 percent down in California, Florida and most of Arizona and Nevada starting March 1. It would also stop insuring loans nationally for homebuyers with less than 3 percent down.
“In looking at the data, even a 3 percent downpayment makes a big difference whether a loan is ultimately successful,” said spokeswoman Beth Haiken. “In those declining markets we are requiring a minimum of 10 percent down. I think we’re certainly not alone in trying to manage that risk effectively.”
Other industry giants, like the largest U.S. mortgage insurer, MGIC Investment Corp., announced plans last week to limit their exposure by demanding higher credit scores and larger downpayments.
Starting March 3, the company said it will require at least 5 percent down on homes in so-called restricted markets. They include the entire states of Arizona, California, Florida and Nevada and major metro areas such as Washington, D.C., Detroit, Chicago, Boston and Atlanta. Those buying condos would have to put down 10 percent.
The Milwaukee-based insurer will require higher credit scores as well. Homeowners in the restricted markets who put at least 10 percent down will have to have scores of at least 620 out of a possible 850.
MGIC announced last month that it could pay $2 billion in claims this year, up from previous estimates of $1.5 billion. MGIC blamed rising delinquencies and claim sizes.
PMI reported paying $92.6 million in claims for the third-quarter of 2007, a rise from $62 million year-over-year. The company also reported a net loss of $65.2 million in the third quarter of 2007, compared with net income of $70.8 million the year before. PMI plans to release its fourth-quarter report on Feb. 26.
Haiken said that 32 percent of PMI’s mortgage insurance went to homeowners with less than 3 percent down. By the end of the fourth quarter it declined to 21 percent.
“But we thought it was still too high for our taste,” Haiken said.
Buyers typically must get mortgage insurance when they put down less than 20 percent of their home’s value. When borrowers miss payments, as more have been doing, the insurers pay lenders. If homes end up in foreclosure, both the lenders and insurers lose money.
“Despite warning signs throughout the industry that (high loan values greater than 97 percent) was a contributing factor in losses, it does not appear that PMI or the industry took steps to rein in production until recently,” reported Steve Stelmach, an analyst with Friedman, Billings, Ramsey & Co. Inc. in Arlington, Va.
Stelmach, who penned a third-quarter report on PMI, said in the report that PMI’s diversification made it able to withstand more risk than other mortgage insurers but it also increased its reserves by $263 million to cope with losses. The average claim size was $68,000, a year-over-year rise of 20 percent.
“What lenders are concerned about are appraisal values in softer markets, and most of California qualifies for that right now,” said Howard Shapiro, a senior equity analyst with Fox-Pitt, Kelton in New York City. “You can’t charge enough for some of the riskier borrowers.”
© 2008, Contra Costa Times (Walnut Creek, Calif.), Barbara E. Hernandez. Distributed by McClatchy-Tribune News Service.
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