Monday, July 28, 2008

Another Business I Never Understood

"Mortgage insurers have been dramatically tightening their standards throughout the U.S. further squeezing potential home buyers. ... The spreading restrictions are a symptom not only of the housing and credit crisis but of the mortgage-insurance industry's own huge losses. The insurers face massive borrower defaults on loans that were approved when securing a mortgage was far easier. ... For a time, it seemed mortgage insurers were going the way of the dinosaur. ... But with piggyback loans all but vanished, prospective home buyers are facing more pressure to purchase mortage insurance. ... This year, mortgage insurers have benefitted from the growing number of loans being funded by Fannie Mae and Freddie Mac, the government-sponsored mortgage companies that require mortgage insurance on loans that don't have a substantial downpayment. ... Nowadays, insurers are frequently requiring at least a 10% down payment, compared with previous standard that might have included a 3% to 5% down payment. Next month, for example, MGIC plans to charge an annualized premium of up to 0.75% of the loan balance for fixed-rate 30-year mortgages with a 10% down payment, up from 0.67% this month", WSJ, 15 July 2008.

Mortgage insurance is another business that never made sense to me. Why should Fannie or Freddie require it? If say, MGIC charges 75 basis points a year for mortgage insurance, Fannie or Freddie can come out ahead by charging another 75 basis points interest and eliminating all the insurers' overhead! What service do the insurers provide?

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