It’s no news that the mortgage industry is in something of a tailspin nowadays. Foreclosures are at a high, and prices are sinking like an anvil in quicksand. What’s worrying isn’t so much that mortgage companies are suffering, but that there’s a domino effect on society that is just now starting to show itself.

One of the first industries to react to the flurry of foreclosures is the Private Mortgage Insurance industry; The insurance that is de-facto required nowadays on all new, conventional home loans.

Just a definition first.

Private Mortgage Insurance (PMI):

PMI is an insurance to protect the lender against the borrower’s default. If the borrower puts less than 20% down, the lender will require PMI insurance to cover their losses if the borrower defaults on the mortgage. The PMI premium payments are in addition to the monthly principal and interest payments on the mortgage and are usually paid as a part of the monthly mortgage payment.

With all the homeowners facing ARM increases that will raise their payments by up to 30%, there is a veritable wave of losses that is sweeping this sector. Each homeowner that goes belly up (financially speaking) costs the insurance company a considerable amount of money. And with no end in sight for the problem, they’re starting to take action…

 

MGIC Investment Corp., the nation’s largest mortgage insurer who last week said it would raise prices and limit coverage, revealed details of its new plan late Friday.

The Milwaukee-based mortgage insurance company plans to limit coverage to borrowers with poor credit, while charging more for higher-risk loans.

Going forward, MGIC will no longer insure home loans for borrowers with credit scores below 575, according to Mike Zimmerman, vice president of investor relations for MGIC. He said the average FICO score on new loans is roughly 700.

MGIC will also limit coverage in harder-hit parts of the country, including California and Florida, where the max loan-to-value will be capped at 95 percent.

Link: The Truth About Mortgage.com – MGIC to limit coverage, raise prices on riskier loans

The sad truth is that this action, while keeping those that shouldn’t be getting a house they can’t afford from buying McMansions, will also make Joe and Jane Consumer MORE dependent on the dreaded FICO score.

While this is good for the insurance providers, it’s a trap for the consumer. By making them dependent on FICO scores, they will have to use credit regularly to improve their credit scores. When your goal is to get out of debt and stay away from credit cards, it’s the last thing you want to happen.

The alternative is to return to the old standards of having 20% or more for a down payment, and with the median house price in many places edging up to $300k, coming up with around $60,000 isn’t a trivial accomplishment.

It could go so far as to cause the existing mortgage problems to be prolonged, since new home buyers won’t be able to get into the purchasing market with these new lending criteria. If too many borrowers are ‘banned’ because of circumstance, it feeds into the problem and slows everything down.

It’s going to have to be quite a balancing act to allow the Insurance issuers to stay afloat, solvent, and making money, while not blocking TOO many buyers out of the market, qualified or not.