Jack Guttentag, aka “The Mortgage Professor”, provides some interesting insights into the mortgage market meltdown in his Sunday Seattle Times article “It’s Time To Expand Role of Mortgage Insurance”. Parts of his article are characteristically dry and difficult to read, but the essence of the message is there. If there is a bright spot in this deluge of not-so-good-news, it is that the mortgage insurance companies, those that impose an insurance policy on mortgage amounts in excess of 80% of property values, are doing OK. Why? Because they are insurance companies. As insurance companies, they have been required to “hold in reserve” i.e., save, a portion of the premiums that they collect in order to weather, without going broke, a housing downturn event. This means that they actually have the money to absorb the losses they are suffering through foreclosures and deflated property values. At least, so far.
Have you wondered how so many managed to get that zero down 100% no doc, no equity, no job loan with having to pay mortgage insurance premiums [“MIP”]? As an alternative, the mortgage bundling geniuses of Wall Street cooked up a risk assessment system that charged loan fees, interest rates and loan types based on risk factors.
“Oh, you don’t want to pay MIP with your loan every month? No problem. We have this little thing called an ARM with an artificially low start rate that is guaranteed to completely blow up your financial life in 2 or 3 years. But don’t worry, we’ll refinance you out of that in a year or so into a 30 year fixed rate loan you can live with. How do we do that? Simple! Your property simply has to appreciate to where it will appraise for 20% more than the inflated value that we are using today. Oh, did I say inflated? I meant enhanced. That’s what we say when we pack all of the exorbitant loan fees onto your loan amount. That way, you’re not just getting 100% financing, but about 103% financing. But don’t worry. The important thing is that you are in the market, and surely your property will continue to appreciate at 10-15% per year.”
The Mortgage Professor thinks that MIP is the way out of this mess. Once considered a nuisance to borrowers, it may now be a blessing as a means to refinance loans that exceed 80% of appraised property values and allow owners to keep their homes.
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