MGIC Tightens Underwriting Guidelines…Again

MGIC has released underwriting guidelines that will go into effect on new applications as of June 1st. Here is the PDF.  Didn’t MGIC just finish doing that in March? From Housing Wire:

For all markets — so-called restricted markets or otherwise — MGIC said it will essentially no longer provide MI for any Alt-A loan. The company also said that it will no longer allow cash-out refinances in any market, investment properties, multiple units, and option ARMs to be eligible for its mortgage insurance. The insurer also will require a minimum of 3 percent down on any eligible purchase transaction

and this:

Loans in the conforming jumbo range — in a non-restricted market — must have a minimum of 90 percent CLTV and a minimum FICO of 700 to qualify for MGIC underwriting; in restricted markets, the CLTV requirement is tightened to 85 percent. MGIC said it will not insure any loan above $650,000 in any market.

As I have been saying for many months now, underwriting guidelines will, and should, continue to tighten until defaults begin to slow down.

58 thoughts on “MGIC Tightens Underwriting Guidelines…Again

  1. From Lou Barnes’ column this afternoon:

    “The elephant in the room, who cannot be mentioned in polite company: We gave mortgages to a few million households with deficient long-term financial behaviors, hopelessly incompatible with home ownership.

    That’s a hell of a thing to say about fellow citizens, but it is the case. “Subprime” by definition meant below the minimum standards of the FHA. Roughly $1.5 trillion will default: half of subprime and a like amount of the worst of alt-A.”

    Perhaps MGIC is trying like mad to get ahead of a future onslaught of Alt-A defaults.

    We should expect futher tightening of underwriting guidelines on “prime” loans in a few months.

  2. Someone can correct me if I’m wrong on my underlying facts, but doesn’t this company have relatively little exposure to sub-prime and even much at all written prior to 2007? Wasn’t the whole point of 80/20s to avoid PMI?

    Assuming that’s the case, I wonder how that affects what they’re willing to do. They don’t have the worst of the loans, but they also have a relatively small income stream because they’re only receiving revenue from the most recent loans.

  3. Hi Kary,

    Good question. Looks like they sold insurance on pools of mortgage loans that are going bad. From their Feb 13 2008 press release:

    “Losses incurred in the fourth quarter were $1.35 billion, up from $187.3 million reported for the same period last year due primarily to the increase in both the number and size of loans that are delinquent, increased loss severity, decreased cure rates in certain markets, particularly California and Florida, continued weakness in the Midwest, and increased paid losses…”

    and this:

    “As of December 31, 2007, the delinquency inventory is 107,120. At December 31, 2007, the percentage of loans that were delinquent, excluding bulk loans, was 4.99 percent, compared with 4.08 percent at December 31, 2006, and 4.52 percent at December 31, 2005. Including bulk loans, the percentage of loans that were delinquent at December 31, 2007 was 7.45 percent, compared to 6.13 percent at December 31, 2006, and 6.58 percent at December 31, 2005.”

    Looks like the loans they insured in “bulk” have default rates that are continuing to grow.

    MGIC is projecting zero revenue in 2008.

  4. Kary,
    Private mortgage insurance companies also did 100% financing which programs such as Fannie’s Flex 100. Even if the pmi was not broken out in the payment, it was there and paid for via the rate/rebate (LPMI). Flex 97 was (is) also popular.

  5. There’s really not a bright line division between sub-prime, Alt A and Prime. The spinmeisters would like us all to think otherwise, as a crisis containment strategy, but it is a blurry line at best.

    But you are right Kary, as far as I know, the PMI companies have little exposure in “sub-prime”.

    PMI companies could have quite a bit of exposure to loans with subprime-like characteristics: stated income, no assets, interest only, or neg am, or some combination of those factors, at higher LTVs. There are lots of those out there, and they generally go by the name “Alt-A”. As 2nd mortgages grew increasing less attractive in late 2006 and throughout 2007, and harder to place, PMI stepped in.

    PMI companies’ increasing exposure derives mainly from declining home values combined with high LTV, as that is the most accurate predictor of defaults (IMHO), see Boston Federal Reserve study….

    The fact that they are worried, and continually retrenching is evidence that the crisis is not yet contained.

  6. Jillayne:

    Tightening guidelines could be a contributing factor in increasing defaults. If folks cannot qualify for a refinance into acceptable terms, and there are no buyers to sell the home to, there are limited options left.

    So, I do not wish for even tighter guidelines. Not that what I think about them matters… :).

    Did you see where Fannie Mae says they plan to offer 120% financing for current but “underwater” borrowers with FMA loans? Those details should be interesting. Who will provide the PMI for THAT!!

  7. So, does anyone else think that if lenders don’t agree to do more workouts, they will end up with more foreclosures, which sell for less than market value. And, in areas with lots of foreclosures, these foreclosures end up creating a ‘new market value’ because of high numbers of foreclosures, which in turn means more people are upside down, and go into foreclosure. Sort of an endless circle of horrendous loss.

    By not making more work-outs happen, it seems like lenders create their own destiny: More foreclosures.

    And, yes, I agree that this might make more people quit making payments, but in reality, I think most people value their credit rating, and if they see stabilization happen in their neighborhood, they won’t jump ship on a home they really can afford.

  8. Fannie Mae released a memo this week which included an announcement regarding their “Keys to Recovery” initiative which would allow “underwater” homeowners to refinance their mortgages (owned by Fannie Mae) up to 120% loan to value.

    I would rather prefer this or see lenders do second mortgages instead of writing down or forgiving balances.

  9. Hi Leanne,

    Loan servicing departments run on a shoestring budget in order to maximize profits. Loan servicers are starting to face their own meltdown in that there are too many requests for short sales, loan modifications, let alone all the defaults and foreclosures and not enough trained people at the top, meaning, the decision makers.
    (I worked in the foreclosure department of a nat’l mortgage bank during the last serious real estate downturn in the late 1980s.)

    Loan modifications and short sales can’t and don’t just “happen.”

    Modifying loans at the ring of a phone would mean prolonging defaults way into the future.

    We threw underwriting guidelines out the window and look what happened. If we throw them out the window now, then a certain percentage of folks who receive loan mods WILL default again.

    Financial institutions must also take care to enact sound underwriting guidelines for folks seeking loan mods and short sales.

    The opposite would reward people for defaulting on their loans; a moral hazard.

    I believe that it’s disrespectful to the homeowner to keep the homeowner in their home if they honestly cannot afford the payments. Why chain them to a mortgage payment and a home that’s losing its value when those folks can start rebuilding their credit NOW, instead of prolonging foreclosure for a few more months?

    Loans were made that should not have been made.
    Let’s not make the same mistake again and modify loans that should not have been made in the first place.

  10. Jillayne, regarding the shoestring budgets comment, the banks need to learn that they can no longer do business that way. I’ve stated in the past that they’d make more money paying attorneys $200+ an hour to handle this for them, then with the current system. The goal is to prevent foreclosures, and the banks have procedures that virtually ensure foreclosures. (BTW, the new distressed property law in Washington won’t help–yet another reason for a listing agent not to get involved with a short sale.)

    Rhonda, thanks for the info on the Flex programs. Jillayne, I wasn’t trying to say they had no exposure, just that it wasn’t that much. Prior to 2007, there were a ton of 80/20 loans, and I don’t believe anyone has said those were covered by PMI. IMHO, a smarter buyer (at least in Washington) would have gotten a 100% (or 95%–whatever) loan and paid PMI, but that’s because I think in terms of worst case scenarios, and 100% is less risky for a buyer than an 80/20 in the event of default. So undoubtedly there were a few smart buyers, and thus some exposure to the PMI folk.

  11. One tip I learned at a Fannie Mae conference earlier this year is that if borrowers have PMI on their mortgages, and they’re having troubles with their payment, they should also contact the PMI company. They have staff to help homeowners as well–they have an interest in preventing foreclosure, if possible, when they are insuring the lender. Homeowners should still contact the lender–the private mortgage insurance company is simply another possible resource.

    Roger is correct that the continued tightening is going to compound the issues with foreclosures. We’re dealing with declining values and higher loan-to-values…people are stuck with their mortgages and if they have an ARM that’s adjusting higher (many ARMs are adjusting fine–depending on the cap and index), they’re in deep weeds.

  12. Kary, some lenders may also take out pmi on second mortgages without the borrower knowing–to insure the lender. The cost would be factored into the rate the borrower paid. Only the bank would know. So private mortgage insurance companies were exposed to 80/20 financing in addition to the Fannie/Freddie higher ltv programs.

  13. # 10 Rhonda, funny!!!

    # 9 Jillayne, thanks.

    Regarding the moral hazard philosophy … I agree with that in theory, but today what I see out there is a bigger problem than that.
    It’s more like the problem of ‘which came first, the foreclosures or the price declines that caused more foreclosures’ …. it’s a chicken of an entire different kind that we’ve seen before …

    I feel we’ve got a spiral going on that is so extraordinarily bad in some states, that homeowners who have never been late or in trouble are now seeing their own property values declining at a rapid clip. If something isn’t done, those people lose more of their own equity than they would lose if the foreclosure problems are stopped.

    Yes, some individuals would seemingly gain unfairly — but the overall good for the whole is much more important than the good for the few.

    Of course, many owners will just go into foreclosure again, but I just don’t see how it would be more expensive in the overall picture to try to stop the massive bleeding now, rather than let it trickle for the next year or two, and bring down the entire economy as a result.

    Loans that should not have been made, were made. It seems to me that those that have the gold deserve more of a “hit” than those who took the gold … ie, most people who may have lied to get into their loans were not nearly as sophisticated as those who designed and offered those loans. To say it’s the individuals fault is a little like saying the wolf deserves to eat the chickens because the chickens should have known better than to trust the wolf …. hmmm, there must be a better parable out there than that 🙂 !

    And, no one can argue today that the foreclosures are just this “one” group of people … the foreclosure ripple is quite wide; preventing it from becoming a wave and then a tsunami should be considererd, and darned fast.

    I also agree with Kary – it’s nonsense to not have enough staff to resolve these important financial issues quickly. Attorneys, real estate agents, underwriters, loan officers – there are a lot of people who have industry background who could quicky be hired, and trained to work the problems.

    Part of the problem seems to be the low-level staff who don’t have enough authority, and don’t have enough time in a day to do their jobs.

    I find it both distasteful and appalling that in some areas of high foreclosures that the foreclosures are just about the only properties now selling, which means that overall prices for non-foreclosed properties slide down down to the same level of poor performance of the foreclosed properties, which was brought on by the lending fiasco.

    It seems to me that Mr. and Mrs. Average Homeowner are going to get clobbered by this mess just as if they were guilty of imbibing in the champagne ….

  14. For the banks, it makes sense that they should try to avoid foreclosures and cut their losses by offering terms that the homeowner can bear. However, corporates are rarely prudent about accepting short-term write-downs to avoid worse long-term impacts to their bottom line. I guess its a game of chicken in which both are going to lose. Unless they both cry uncle and beg the taxpayer to bail them out. Oh wait, they’re doing exactly that.

    Sad that what Lou Barnes is saying is still considered non-PC. After all this? Mr. and Mrs. Average Homeowner are going to get clobbered by an unsustainable run up in prices. Non-foreclosed properties should also see their prices fall – I think it is neither distasteful nor appalling – just a merciful intervention of reality that an speculative rise in prices in a short time is rolled back.

    Mr. and Mrs. Homeowner should have considered that their purchase involves risk. If they bought a long time ago, they should be fine. If they bought recently, well, tough luck. Its a free country. Free to make speculative, ill-considered decisions. Free to fall flat on your face as a result of your decisions of putting all your eggs in one over-hyped basket. The next time, maybe they’ll be a little wiser? Maybe they’ll pause before they unhesitatingly swallow lines such as “Real estate only goes up” and where this kind of “advice” originates.

    The American Life had a nice piece recently about the mortgage side of this mess. Nothing that we did not already know but a fresh look worth listening to.

  15. anamik wrote: “For the banks, it makes sense that they should try to avoid foreclosures and cut their losses by offering terms that the homeowner can bear. However, corporates are rarely prudent about accepting short-term write-downs to avoid worse long-term impacts to their bottom line.”

    It’s not a question of being prudent–it’s a question of being responsive. If they don’t want to do short sales, they should just say so and quit wasting everyones’ time. But that’s not what they do. Instead they pretend they do short sales, and then make it very difficult for everyone involved, which decreases their ultimate return. It’s an absurd system.

  16. “By not making more work-outs happen, it seems like lenders create their own destiny: More foreclosures.”

    Absolutely. It’s in the lenders’ best interest to voluntarily reduce the principal of defaulting mortgage holders even if it sparks a wave of intentional defaults. It can’t possibly be any worse than the foreclosure death cycle.

  17. I would like to see the lender do a second mortgage instead of forgiving the first mortgage. The second mortgage could be “silent” unless the homeowner refi’s or sells the property within a certain period, in which case, the second mortgage would need to be paid off.

  18. We’re all (well not anamik) forgetting that often lenders or loan servicers are dealing with investors.

    The investor has to agree to the write down, yes?

    After listening to This American Life (as recommended to me by anamik and others,) I can only say that we are in for years of rising defaults.

    I don’t see stabilization on the horizon at all.

    Why would anyone agree to go up to 120% LTV on a refinance when they could rent for way, way less than their mortgage payment?

    Surely some folks will want to stay in their homes, just as some folks will decide to cut their losses now and begin rebuilding their credit instead of postponing the inevitable.

    No matter which way we turn, this whole mess will not turn out well.

    If I were a corporate bag holder right now, I sure as hell would be asking the fed for the same deal that JPMorgan and Bear Stearns received.

    Maybe the banks/loan servicing companies are all just stalling, waiting for a fed bailout.

  19. “Why would anyone agree to go up to 120% LTV on a refinance when they could rent for way, way less than their mortgage payment?”

    This is partly why I wish lenders would consider a second w/no payments due…but I still think that a homeowner who is currently in possible trouble but could afford payments IF THEY COULD REFI but the only thing that’s holding them back is the LTV restrictions, they would refi and stay in their home.

    I’m dealing with home owners who are seeking help with refinancing but there are no comps to support values required for the transaction. A borrower would not have to go up to 120% (and I’m sure that there would be price hits all the way up the LTV ladder)…but to losen the restrictions on a rate term refinance would prevent SOME (not all) foreclosures.

    A fed bailout would be bad. When you read B. Franks site regarding the mortgage plans they’re passing, he states “this is not a bailout”…

  20. Jillayne wrote: “Why would anyone agree to go up to 120% LTV on a refinance when they could rent for way, way less than their mortgage payment?”

    Perhaps because they don’t want to go through any foreclosure, let alone two: Being foreclosed out of their house and being foreclosed out of being able to ever by another one–no matter how long they wait!

    Stated differently, I think the ability of people with foreclosures on their record to get financing (ever!) will disappear for a lot longer period of time than sub-prime loans.

  21. Jillayne wrote: “Why would anyone agree to go up to 120% LTV on a refinance when they could rent for way, way less than their mortgage payment?

  22. Which is worse? A tax break or the overall lowering of propert values for everyone?

    Seems to me that a tax break would get things back on track for stabilization. Low sales = low excise tax paid, which an entire set of new problems.

  23. Question for the tax break cheerleaders: Would you be willing to open up your checkbook right now, today, and write a check to the banks?

    If your answer is yes, how much money would you be willing to spend right now?

    If your answer is no, then how ought the U.S. pay for such a tax break?

    Let’s see….how much are we in debt right now?

    How many trillions did the banks and lenders make during the bubble run up?

    Dragging this out with bailouts will ONLY lead to a prolonged recession and postpone the housing recovery than many more years into the future, which I am fearful will happen.

  24. There’s an interesting column in HousingWire about massive mortgage fraud across the board. This would explain why loan servicers are not approving more short sales and loan modifications.

    When the homeowner must come clean with accurate data, thereby proving their own part in the fraud, they might just decide it’s better to just let the foreclosure happen.

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