FHA Loans Whittling Away at MGIC Market Share?
February 26th, 2010
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FHA has increased its market share of US home loans from about 4% to approximately one third of US mortgage loans since the housing boom ended in 2006. The rapid increase in FHA insured mortgage loans is evidently perceived as a threat to MGIC, the nation;s largest insurer of conventional mortgage loans; the company has unveiled a plan for charging lower premium costs based on borrower credit scores. The increase in FHA mortgages is widely considered the result of under served communities turning to FHA when sub prime lenders disappeared.
From Subprime to FHA: The Great Migration
FHA guidelines require mortgage lenders to verify income and employment and will soon require lenders to charge down payments of 10% for borrowers with FICO credit scores lower than 580; conventional lenders typically require credit scores in the mid 700’s for getting the best mortgage rates. MGIC insures mortgage lenders against defaults on conventional mortgage loans made for greater than 80% loan-to-value (LTV). Conventional mortgage lenders, wary of the fallout from high delinquency and foreclosure rates, are typically requiring 20% down payments. Mortgage loans with 80% or less LTV ratios don’t require mortgage insurance. If anything is cutting into MGIC’s business, it’s likely fewer conventional mortgage loans being made at more than 80% LTV.
FHA and MGIC: Meeting at the Crossroads, or Not?
FHA currently offers the only alternative to high cost subprime lending to borrowers wishing to buy or refinance homes with a low downpayment and compromised credit. FHA offers more lenient approval guidelines that accommodates the needs of borrowers with less than stellar credit scores and who have steady income, but can’t afford large down payments. Conventional lenders, wary of foreclosure losses, are upping the ante by requiring higher credit scores and increasing fees for borrowers perceived to be high risk. On the other hand, well qualified conventional borrowers may choose an FHA loan to avoid paying 10 to 20% down. FHA guidelines permit as little as a 3.5% down payment for qualified borrowers with credit scores of 580 and above. As conventional lenders tightent their underwriting requirements, FHA loan programs offer a bit more breathing room for borrowers who have moderate incomes and/or credit issues.
When shopping for a new home or refinance mortgage, I recommend getting mortgage quotes for both FHA and conventional home loans; FHA’s higher LTV allowances can also be helpful for refinancing in situations where your home value has declined. FHA approved mortgage lenders can answer questions and help you find FHA home loans compatible with your home financing needs.
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