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
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.
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.
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
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?