Traditionally, this insurance is sold to buyers who make small down payments, typically less than 20%, and is designed to protect lenders if a borrower defaults. The policies were widely used during the housing boom, but insurers scaled back amid rising foreclosures. Demand for the product plummeted when banks ended low down-payment programs for most borrowers.
But now, as home values are rising and banks are experimenting with looser lending standards, private insurers are preparing a comeback. They are especially interested in private jumbo loans, which exceed $417,000 in most of the country and $625,500 in pricier markets. To appeal to wealthy borrowers, insurers are lowering costs and increasing the size of mortgages they will cover.
In December, Mortgage Guaranty Insurance Corp., a private-mortgage insurer, increased the maximum mortgage it will insure from $750,000 to $850,000. Genworth Mortgage Insurance also raised its cap to the same level from $625,500 in October. Both insurers say they will consider even larger loans on a case-by-case basis. Similarly, United Guaranty, a subsidiary of AIG, which insures mortgages of up to $850,000, says it introduced a limited program this year for loans of up to $1 million. Another insurer, Radian Group says it may consider raising its $850,000 cap.
The moves come as the jumbo-mortgage market heats up. Private jumbo originations are on pace to hit the highest level since 2007, and some lenders are lowering down-payment requirements to attract more borrowers.
Jumbo loans account for less than 2% of the total dollar amount of loans that are insured, according to the four major insurers. But these companies say they see an opening to grab market share: They say small lenders, including community banks and credit unions, have been contacting them over the past year in search of insurance for low down-payment jumbos. “We’re making these changes because we sense some level of demand—in the last six months the number of inquiries have increased,” says Anthony Guarino, vice president of risk policy at Genworth.
The slow return to private insurance underscores a shift in the types of borrowers lenders are willing to work with. During the past two years, jumbo lenders have mostly courted the best borrowers—those with lots of cash and strong credit profiles. But experts say they are starting to turn their attention to less-appealing borrowers as the federal government begins its exit from the mortgage market. For instance, starting next year the caps on the low down-payment mortgages insured by the Federal Housing Administration will be reduced in roughly 650 counties. Although not a large group, those borrowers will have to turn to the private market instead.
For borrowers, the re-emergence of private insurance is a mixed bag. It suggests that more lenders could start accepting low down payments in the near term—as long as the borrower signs up for insurance. Most insurers, for their part, say they are willing to cover jumbo loans with at least 5% to 10% down. That could help affluent borrowers free up cash they would have locked into a home to instead put to use elsewhere. Separately, this could also be the only option for young professionals, like recent medical-school grads, who have a large salary but little saved cash to put down.
This insurance is often costly for jumbo borrowers. To begin with, most insurers charge an additional 20 to 60 basis points for these loans compared with a regular-sized mortgage.
Some lenders permit a one-time upfront payment to cover this fee, which for jumbo loans can total roughly 1.2% to 5.7% of the total loan amount.
Another, often costlier, option is to tack on the fee to the monthly mortgage payments; that typically ranges from 0.40% to 2.13% of the total loan amount. On a $1 million loan, that is roughly $333 to $1,775 a month. Several insurers say borrowers have these payments for an average of five to six years before they refinance the loan or build enough equity in their home.
But these extra costs seem unnecessary for many affluent borrowers. Wealth-management departments at some large banks provide 100% financing to clients willing to use a portion of their investment holdings there as collateral in lieu of a cash down payment. Separately, borrowers could turn to banks and credit unions that permit 15% down payments at no extra charge.
Besides the extra costs, jumbo borrowers have to clear tougher hurdles to get this insurance. In many cases, they’ll need at least a 720 FICO credit score; the higher the borrower’s credit score, the cheaper the insurance. Here are other issues:
• Higher costs for ARMs . Insurers charge more for adjustable-rate mortgages than their fixed-rate counterparts. They say ARMs are riskier since the interest rate changes.
• Number of factors . To determine how much a borrower must pay, insurers can consider more than 15 variables, including the home’s location—homes in areas with more foreclosures will result in higher fees—and the number of borrowers on the application. Two borrowers on the application can result in a lower fee.
• Built-in fees . Some lenders will pay this insurance on their own, but will pass on the costs to borrowers in higher interest rates. Borrowers who sign up for a mortgage with less than 20% down should ask about this.