Home buyers take safe route
After taking on risky adjustable-rate loans or multiple mortgages to pay less up-front during the housing boom, borrowers with limited capital for down payments are increasingly opting for safer, fixed-rate mortgages backed by private mortgage insurance.
Applications for private mortgage insurance, or PMI, rose 56 percent from February to 191,525 in March, according to the Mortgage Insurance Companies of America, an industry trade group.
Application volume fell in April, but remained well above rates from last year.
Private mortgage insurance is typically required of a buyer who wants a fixed-rate mortgage but has a down payment of less than 20 percent. It costs a fixed percentage of the total loan, usually less than 1 percent, and insures the lender against default.
About $72.9 billion, or 11 percent, of the $680 billion in new mortgages originated in the 2007 first quarter were backed by PMI, according to Inside Mortgage Finance, a weekly industry newsletter.
That percentage is rising, said Guy Cecala, the newsletter's publisher - and not just because of consumer caution.
"I don't want to give consumers too much credit," he said. "The growth is also due to the fact that there's been a shift away from subprime mortgages toward conventional ones."
Lenders have curbed subprime loans - those to people with poor credit - after that category had a surge in defaults and delinquencies.
But during the housing boom that ended nearly two years ago, lenders were less worried about defaults or federal guarantees, and offered a host of options for borrowers without large down payments.
Many customers took on loans with low introductory payments that would reset a few years later. With home prices rising, owners reasoned they could sell the property before the payment rose or refinance at a lower or fixed rate.
"People thought the system was working for them, so why pay more initially when prices are rising," Wachter, the Wharton professor, said.
David Katkov, president of PMI Mortgage Insurance Co., the industry's largest player, credited consumer awareness for the sector's gains.
A temporary change in tax laws making mortgage insurance payments tax-deductible also boosted demand, said Katie Monfre, a spokeswoman for Mortgage Guaranty Insurance Corp., the third-largest mortgage insurer.