While many in our industry applauded the proposed reintroduction by Fannie Mae and Freddie Mac (the GSEs) of a 3% down-payment loan with private mortgage insurance (MI), it certainly has not been unanimously well received. To be honest, many of us here at MGIC have been a bit surprised regarding the somewhat pessimistic reaction or apprehension to the news.
What perhaps makes those reactions even more confusing is the simple fact that similar products have long been available through government programs such as the FHA.
As the pioneer and founder of today’s private mortgage industry, MGIC has a long history insuring loans with a 3% down payment, and our experience is that such loans perform well when prudently underwritten. Based on our experience, we support the efforts of the GSEs to bring back 97 LTV eligibility.
Here’s a quick look at three reasons why restoring a conventional 3% down loan product insured by private mortgage insurance makes sense to MGIC.
Options for Today’s Borrowers
Survey after survey, study after study, continue to reinforce that the down payment remains the biggest hurdle for first-time homebuyers. Unemployment and a slow economy have only exacerbated the challenge for many to build toward the current minimum 5% down-payment.
True, the FHA offers a lower 3.5% down-payment but at a substantially higher cost and without the ability to cancel the FHA insurance once the borrower’s equity has reached a comfortable level.
Restoring a conventional 3% down loan option featuring private mortgage insurance offered by Fannie Mae and Freddie Mac, would give borrowers additional – lower cost – alternatives to consider when shopping for the right mortgage for their individual circumstances.
Plus, borrower-paid MI can be cancelled, so borrowers will save even more money down the road. WalletHub’s recent Mortgage Insurance report covered this exact issue, estimating borrowers could save up to $12,000 by using conventional mortgage insurance compared to FHA.
However, it is not just the first-time homebuyers who can benefit from this option.
Move-up borrowers who have outgrown their starter home and are stretching to reach a 5% down due to the previous years of property value declines, may prefer to choose a 3% down alternative and keep a larger “rainy day” fund for unexpected events.
Likewise, borrowers who are relocating to a higher-cost area of the country would benefit from the ability to obtain a 3% down loan with mortgage insurance.
Giving borrowers an additional choice in the form of a 3% down loan with private mortgage insurance would have the welcome benefit of protecting taxpayers better as well.
When FHA insures a 3.5% down loan, the taxpayer is fully responsible for any losses. When MGIC insures a 3% down loan, private capital is in the first loss position.
The private mortgage insurance industry has proven itself, having paid 96% of its claims throughout the housing crash, despite only one of the current MI companies having benefited from government bailout funds. MGIC alone has paid over $13 billion in claims since 2008. Money the taxpayers may have been forced to cover had those loans been FHA.
If 3% down loans are going to be offered (and I don’t think many are suggesting the elimination of the FHA’s 3.5% down loan product), then taxpayers are better off with less, not more, loss exposure.
Prudently Manage Risk
Some of the naysayers have pointed to the idea of the slippery slope they fear the reintroduction of conventional 3% down loans may cause. Some even going as far as predicting it would inevitably lead to another mortgage disaster.
This assumption seems unwarranted. A 3% down offering preserves the need for “skin in the game” while potentially expanding homeownership availability to credit-worthy borrowers. Borrowers who would be successful homeowners if only they could overcome the down payment challenge.
No lower down-payment loan is without risk, but the incremental risk generated by reducing the minimum down-payment to 3% from 5% is known and manageable. MGIC’s experience insuring the 3% down loans has been satisfactory through the credit cycle. Especially when it is done with reasonable, credit overlays that help minimize layering of risk.
Restoring the 3% down loan with MI is an important step in demonstrating that consumer choice and consumer protection can work well together. It is far from an irresponsible act. It is simply an idea that makes sense.Tags: 3% Down, 97 LTV, GSEs, Mortgage Industry, Mortgage Insurance, Top Content