Mortgage insurance increases are raising rates substantially

Nation's Housing

August 18, 2002|By KENNETH HARNEY

WHILE MORTGAGE rates fell to near-record lows earlier this month, one large category of American homebuyers saw rates spike the other way. They were hit with substantial price increases on their mortgage rate quotes - but they may not have understood it at the time.

Welcome to the arcane world of home mortgage "risk-based pricing," where your credit score is your destiny, and your credit files determine the interest rate you pay.

What happened this month: Private mortgage insurance companies nationwide decided that certain borrowers with slightly-imperfect credit profiles - known in the trade as "A-minus" - represent a greater risk of default in today's economy than previously thought. So they raised their insurance premiums enough so that some applicants' rate quotes soared by 1.5 percentage points.

Borrowers who otherwise would have been quoted about 8.5 percent effective rates were suddenly asked to pay close to 10 percent. On a $200,000 fixed-rate 30-year loan, that rate spike produced an immediate $198 increase in monthly mortgage payments, from $1,533 to $1,751.

As is customary in the mortgage insurance field, no public announcements were made about the rate increases for blemished-credit applicants. There were no press releases or news coverage. Mortgage lenders simply were informed by the insurers that loan applicants with specific credit profiles would have to pay higher monthly insurance premiums - pushing their effective rates up substantially.

Geoffrey F. Cooper, a spokesman for the highest-volume private mortgage insurer, MGIC Investment Corp., said the rate increases mainly affected applicants with "FICO" credit scores between 575 and 620 and high debt-to-income ratios.

FICO scores - named for their developer, Fair, Isaac & Co. Inc. - are widely used in the home-loan industry to gauge applicants' risk of future default. FICO scores generally run from the upper 300s to above 900, with the highest scores indicating the lowest risk of nonpayment.

When virtually all homebuyers apply for mortgages, their credit scores are generated by running their full credit files through Fair, Isaac's proprietary software. People who have failed to pay creditors or paid bills late - or worst of all, filed for bankruptcy - tend to get scores in the 500s and below. People who have managed their credit affairs responsibly, with no late payments and no judgments against them, tend to score from the high 600s upward.

The applicants hit with the sudden rate increases in August are people on the credit bubble: Their FICO scores aren't high enough to qualify them for the best available interest rates and terms. But neither are they exceptionally bad.

Lenders require borrowers to purchase mortgage insurance when they buy a home with less than a 20 percent down payment. Private mortgage insurers cover lenders' exposure to financial loss in the event of nonpayment or foreclosure, and typically roll their premiums into borrowers' monthly payments.

Without private mortgage insurance, many cash-short buyers would not be able to qualify for a loan. Insurers have played an especially significant role in the development of the huge low-down-payment financing programs run by investors Fannie Mae and Freddie Mac. They have also been key players in programs targeted at first-time buyers with imperfect credit who would normally have to pay high rates in the "sub-prime" market.

But like all insurance companies, they set their premium rates based on perceived or predicted risks. And for much of 2002, mortgage insurers have seen delinquencies rising in the A-minus segment of their portfolios.

One effect of the insurance rate increases, say mortgage industry officials, will be to encourage some consumers to take a second look at alternative financing options, including Federal Housing Administration mortgages.

FHA loans require minimal down payments, carry competitive rates and are targeted at buyers who have blemished credit, high debt-to-income ratios and who may not be able to obtain affordable financing in the conventional market. FHA mortgages carry their own built-in insurance coverage and premium payments; the insurer, however, is the federal government, not a private company.

Loan applicants with A-minus credit should at the very least shop vigorously - with the help of mortgage brokers, bankers or online - to spot the best deal.

Kenneth R. Harney is a syndicated columnist. His e-mail address is kenharney@ Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

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