Mortgage Insurance in The United States

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Mortgage insurance began in the United States in the 1880s. The first law was passed in 1904 in New York. The industry grew as a result of the housing bubble of the 1920s and became “completely bankrupt” after the global economic crisis. Until 1933 there were no private mortgage insurance companies. The bankruptcy was related to the participation of the industry in “mortgage funds”, an early practice similar to mortgage securitization.

The federal government began mortgaging in 1934 through the Federal Housing Administration and the Veterans Administration, but after the Great Depression, private mortgage insurance was not allowed in the United States until Wisconsin passed a law in 1956 that allowed the first mortgage insurance after the Depression allowed the formation of Guaranty Insurance Corporation.

In 1961, a California law followed, which would become the standard for mortgage insurance laws of other states. Finally, the National Association of Insurance Commissioners has created a model law.

Max H. Karl, a lawyer in Milwaukee, invented the modern form of private mortgage insurance and helped millions of families put their homeownership within reach. In the 1950s, Mr. Karl was frustrated with the time and paperwork necessary to obtain a home backed by state insurance, the only one available at that time.

In 1957, Karl Karl founded $ 250,000 of friends and other investors in his hometown of Milwaukee and founded the Mortgage Guarantee Insurance Corporation (MGIC). Unlike many mortgage insurers that collapsed during the Depression, MGIC would only ensure the first 20 percent of a lost mortgage loss, which would limit the risk and create more incentives for savings and loan associations and other lenders that only provide loans. to home buyers who could afford this?

The guarantee was sufficient to encourage lenders across the country to grant mortgage loans to buyers whose initial payments were less than 20 percent of the price of the home. The availability of credit contributed to the reactivation of the housing boom of the sixties and seventies. At the time of Mr. Karl’s death in 1995, more than 12 percent of the nearly $ 4 trillion in housing mortgages had private mortgage insurance.

In 1999, the Homeowners Protection Act of 1998 came into effect as federal law of the United States, which requires the automatic cancellation of mortgage insurance in certain cases for owners when the loan at home value reaches 78. %; before the law, the owners had a limited resource to cancel and according to an estimate, 250,000 owners paid for unnecessary mortgage insurance. Similar state laws existed in eight states at the time of their approval.

In 2000, a lawsuit by Eliot Spitzer resulted in reimbursements due to the failure of mortgage insurers to comply with a 1984 New York State law that required insurers to stop charging owners after a certain point. These laws may continue to apply; for example, the New York law provides “broader protection”.

Private Mortgage Insurance

Private mortgage insurance (PMI) is generally required in most conventional (non-government) mortgage loan programs if the initial payment or capital position is less than 20% of the value of the property. In other words, if the purchase or refinancing of a mortgage loan with a conventional mortgage and the LTV is greater than 80% (or the equity position equivalent to less than 20%), it is likely that the borrower will have to take out mortgage insurance. private.

The PMI rates can range between 0.32% and 1.20% of the capital balance per year, depending on the percentage of the insured loan, the LTV, a fixed or variable rate structure, and the credit valuation. Rates can be paid once, annually, monthly or in a combination of the two (divided premiums). Most people pay the PMI in 12 monthly installments as part of the mortgage payment.

In the United States, PMI payments by the borrower were tax-deductible until 2010.

Several private mortgage insurers failed during the financial crisis of 2007-2009.

Borrower Paid Private Mortgage Insurance

The Borrower paid for Private Mortgage Insurance (BPMI) is today the most common type of PMI in the mortgage loan market. BPMI allows borrowers to obtain a mortgage without having to make a 20% down payment by securing the lender for the added risk of a high-quality mortgage loan (LTV).

The US Homeowners Protection Act (UU) From 1998, borrowers can apply to cancel the PMI if the amount owed is reduced to a certain level. The law requires that the mortgage insurance paid by the borrower be canceled on reaching a certain date.

This is the time when the loan is expected to reach 78% of the original estimate or the sale price, whichever is lower, depending on the original fixed rate loan repayment program and the current mortgage repayment program. adjustable rate. BPMI may in some circumstances be canceled by the Administrator requesting a new valuation showing that the balance of the loan is less than 80% of the value of the home as a result of the valuation. This usually requires at least two years of on-time payments.

The LTV requirements of each investor for the termination of the PMI vary depending on the age of the loan and the current or original occupancy of the home. While the law at the time of closure applies only to single-family homes, investors Fannie Mae and Freddie Mac allow mortgage lenders to apply the same rules for second homes. Investment property usually requires a lower LTV.

There is a growing trend to use BPMI with Fannie Mae’s 3% down payment program. In some cases, the lender grants the borrower a credit to cover the costs of the BPMI.

Lender Paid Private Mortgage Insurance

The mortgage lender (LPMI) paid by the lender is similar to the BPMI, except that it is paid by the lender and included in the interest rate of the mortgage. LPMI is typically a function of loans that claim that they do not require mortgage insurance for loans with high LTV.

The advantage of LPMI is that the total monthly payment of the mortgage is usually lower than a comparable loan with BPMI. However, since the borrower is integrated into the interest rate, it can not replace it if the capital position without refinancing reaches 20%.


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