Changes to private mortgage insurance (PMI), are coming on April 1, 2013, and May 6, 2013. In April a minor adjustment to cost will take place. But the dagger in the hearts of subprime borrowers everywhere takes place on May 6. On that day, all mortgages with less than 10 percent down (all FHA 3 percent mortgages are included), will require PMI for the life of the loan.
This lending website says this is a minor deal. Sorry, but it is a big deal. PMI has been required for 5 years. It will be required for the life of the loan for less than 10 percent down and 11 years for 10 percent to 19 percent.
The question is, will this destroy the infant housing bubble? I have explained that the housing market is too risky now, with few people putting a stable down payment. With the new FHA rules, the risk to borrowers increases greatly. Lots of folks need the car payment for the car not for insurance that retains lenders as the only beneficiary.
Private mortgage insurance, required on mortgages with less than 20 percent down, is expensive. And the cost can go up, leaving fewer buyers available to afford your house. Quite often, PMI costs as much as $1000 per year on each $100,000 dollars borrowed. So that works out at a 1 percent charge of over $160 per month on a $200,000 house.
Just remember, the extension of this insurance for the entire life of the loan could end up costing about 60 thousand dollars! Tacking that additional 50 grand (60-10) onto the price of a house payment is a big deal, not a minor adjustment.
While it is true that there are a couple of banks, like Key Bank, who take the risk on the loan and don't charge PMI, one wonders if they will be stifled at some point by the Fed, as well.
When homeowner equity exceeds 20 percent, the PMI can be cancelled by jumping through hoops. However, with house prices as volatile as they are, there is no guarantee your house cannot go down in value. You could be stuck with that PMI for a long, long time. Why should you be the Guinea pig for the lenders' mistakes and greed when you can rent and invest the rest?
PMI was avoided by all the piggyback loans that were issued during the biggie housing bubble. But those loans went south and the default was huge. Now, with PMI that could be tampered with and extended by the FHA, default could increase on those loans as well. Don't take on the risk that the banks should be taking. They are making the loan, not you.
So, will an easier money, no money down bubble be tacked onto this current FHA cash buyer bubble, to try to sucker more people into PMI? I am sure the insurance companies would love that. It remains to be seen if buyers will be suckered in again, but it is likely that the Fed and the bankers are counting on it. There are hedge funds who have borrowed a lot from the bankers, and they have been paying cash in bubble areas like Phoenix and Las Vegas, hoping to cash out at higher prices.
Increasing the PMI, in this economic environment will not cause prices to drift higher, in my opinion. It will almost be necessary for easy money loans with easy qualifying to become prevalent again.
This will not work out well for most borrowers. But it will make a lot of hedge funds, insurance companies, and even TBTF bankers happy. It all is guaranteed by the government now, so there is little risk to the bankers. Isn't that the way they want it, all the risk on the borrower and your government, and none on the bankers and their friends?
Mom and pop are now competing with the hedge funds for rental investments in cities that were most affected by the bubble. There are lots of houses that could be dumped onto the market by the banks at any time as prices continue to accelerate. Therefore, the housing market is volatile as to price. Using a mortgage to invest in housing could be dangerous to your wallet.
Cash buyers may be able to benefit from an increase in rentals that could come from a slowdown in FHA buying. But there are a lot of rentals out there by the hedge funds.
Investors could play the housing market through a homebuilder ETF. However, this play is based upon the assumption that a lot more easy money lending and reduced credit score requirements will follow. While that is the aim of the Fed, based upon Ben Bernanke's recent statements, there is no guarantee that this easy money will find its way into the actual housing market.
Headwinds such as increased PMI requirements may slow the demand for housing going forward.
This article first appeared on my blog, Say No To Recourse Loans.