In Chicago, High Homes-For-Sale Inventory Drives Down Some Prices - But Getting a Loan Not As Easy!
PRIVATE MORTGAGE INSURANCE COMPANIES TIGHTEN STANDARDS, TAG MORE "DECLINING MARKET" ZIPS - INCLUDING MUCH OF CHICAGO AREA!
Here in Chicago and the suburbs, prices in some neighborhoods and select suburbs are up. The median sales price market-wide is up over last year.
But, still, in many neighborhoods, inventory is high, as is mortgage default and foreclosures per thousand home owners. Prices in these areas have fallen considerably over the last year. However - this is no boon for prospective home buyers, as conventional borrowers with less than 20% down payment need to acquire Private Mortgage Insurance to protect the lender from buyer's possible default.
Private Mortgage Insurance is getting harder to come by, however. Major PMI Companies, such as the American International Group (AIG) have added dozens of so-called "declining market" zip codes across the country. The Declining Market brush is very broad! In the Chicago Metro Area, with a population exceeding 8 Million, four out of five Mortgage Insurers consider the Chicago Market declining - despite its vibrancy and increasing median price in many neighborhoods.
Mortgage Insurers contend their data isn't specific enough to more precisely define declining market areas.
Today, Mortgage Insurers frequently request a minimum of 10% down - and they might request a 5% "premium" if the zip code is eventually declared "declining."
Beginning in August, insurer MGIC will up their annual mortgage insurance premium to 0.75% of the outstanding loan balance, an increase of 11.9% from the previous 0.67% level. Insurer Triad Guaranty, Inc. announced last month it will soon stop writing mortgage insurance entirely.
The growing scrutiny of those with less-than-20% down payments, who must purchase PMI, is directly tied to huge losses among PMI companies, who lost money during the recent boom market by employing far-easier underwriting standards. Many of the loans insured during better market conditions are now in default, considerably increasing claims, and reducing profits, for Private Mortgage Insurers.
It was not too long ago that loans requiring PMI were far fewer. With the liberal lending standards of a couple of years ago, many home buyers were able to avoid paying for PMI by taking out two separate loans against their new homes - a main loan for 80% of the purchase price, plus a second, higher-rate loan to cover between 10 and 15% of the outstanding balance. Thus, PMI was not required.
Today, however, such "piggyback loans" have virtually disappeared, and more of those with a low down payment are forced to purchase mortgage insurance. The percentage of new home buyers using PMI increased from 8.5% in early 2006, to 20% during the Fourth Quarter of last year. Since then, into 2008, the percentage of buyers seeking PMI has come down to roughly 13% - many low-down-payment buyers have simply left the market!
If the insurers can't keep up with the pace of failing loans they have insured, lenders, could end up without insurance payments to reduce their losses.
To diminish their exposure, mortgage insurers have increased the number of markets and zip code areas they consider declining. Theoretically, zip codes on the list are based on housing starts, number of home sales, and average selling prices, and factors such as area unemployment levels. In areas where home prices are dropping, insurers bear greater risks, since the home is more likely to bring too little at a foreclosure sale to pay off the loan.
As the geography of "declining markets" grows, borrowers are often hit with 5% "declining zip premiums" - even if they are contracting to put down as much as 20% on their purchase. These premiums are often assessed late in the mortgage application process, where there is less likelihood the borrower will be able to come up with the often-sizable 5% down payment increase.
Often, the deal dies! (Dean's Team Chicago had two such loan disapprovals earlier this year, as a result of an assessed "declining market premium" at the last minute, right before scheduled closing).
As PMI requirements become more stringent, more borrowers are turning to FHA Loan Programs. FHA is more liberal in its credit and down payment guidelines - requiring as little as 3% down - although those with more risky credit histories may be charged a premium on the loan. FHA loans are not subject to "declining market" lists.
It is estimated that FHA loans now make up between 10 and 12 percent of new home loans, up from 3% two years ago, when conventional loans were easier to obtain.
For more detail, accompanying video, and an AIG Declining Zip Code Map, read Amy Merrick's article in Tuesday's Wall Street Journal. Here is a link to an AIG Directory of Current Declining Market Zip Codes, which includes most zips in the Chicago area.
DEAN MOSS & DEAN'S TEAM CHICAGO
