Why you should care
Real estate is the biggest investment many people will make, so when a crucial part of the industry shifts, it’s time to pay attention.
In the heady pre-crash days of, say, 2006, home buyers who couldn’t afford a full 20 percent down on a home turned to private mortgage insurance to help back their buy. The homeowners paid for the insurance, which insured the lender against default, but they also snagged a house.
The reasons for the American housing crash fill entire library bookshelves, so we’ll skip the gory details and just note that the market for private mortgage insurance tanked. If you wanted a house and couldn’t cover the 20 percent, often the best choice was a government-backed Federal Housing Administration mortgage.
36 percent of mortgages now involve private mortgage insurance, according to the Urban Institute.
Why does this matter?
Because it’s an entire industry getting back on it’s feet. The PMI business halted in part because with so many poor lending decisions, and so many loans defaulting, the mortgage insurance companies foundered. But the market turned, and investors are starting to put their millions where the PMIs are.
Because the federal programs may not be keeping up with need. The FHA backs certain housing loans for lower down payments, and include their own insurance. But experts, including Bing Bai, a research associate for the Urban Institute who co-wrote the PMI post, say the FHA isn’t keeping up with the market. On April 1, the president of the National Association of Realtors publicly chastised the FHA, saying their rising insurance costs are driving away buyers, especially first-timers. Many of those who can’t afford the extra costs of the FHA loans also can’t get private insurance, and are essentially locked out of the market.
What does it mean?
As Bai notes, traditionally the FHA has been the go-to mortgage service for boosting first-time buyers with limited savings into the realm of homeownership, which in turn is often a major financial upward step for the average Joe.
So the new numbers on private insurance show that the old assumptions are going out the window.
”You have other options,” Bai says. “A lot of people don’t know it.”
If you’re looking to buy your first house, don’t just look to the feds, despite what history might tell you. Especially if you’ve got a good credit score – the potential difference could be in the ballpark of $100 a month.
If the private companies will have you.