New Mortgage Insurer Offers Banks Increased Protection

by Kate Berry MAY 1, 2013 1:09pm ET

At a time when several big banks are locked in bitter legal disputes with mortgage insurers, a new entrant is upending the traditional business model by underwriting every single loan it insures.

Before the financial crisis, lenders typically would submit loans to mortgage insurers for approval or would receive delegated underwriting authority, in which insurer would once a year underwrite a sample of 5% to 15% of insured loans. That model ultimately proved fatal to many insurers during the housing bust, leading to an estimated $30 billion in claims paid mostly to Fannie Mae and Freddie Mac. Often insurers also refused to pay claims and those rescissions led to massive litigation.

But newcomer National Mortgage Insurance is trying to differentiate itself by offering banks and mortgage lenders more beneficial terms and increased underwriting protection. It began writing policies in 46 states in April and has signed up roughly 100 banks and mortgage lenders as customers.

“We’re underwriting every loan and providing feedback through a second set of eyes on what banks and lenders are originating,” says Bradley Shuster, the firm’s president and chief executive.

The Emeryville, Calif., insurer is also bucking industry trends by limiting the liability for lenders. It says it will not ask banks to buy back loans either for lender mistakes or borrower fraud as long as the homeowner makes 18 months of consecutive on-time mortgage payments.

Glen Corso, National Mortgage Insurance’s general counsel, who had been managing director of the trade group Community Mortgage Banking Project, says rescissions were “a huge influence” on how the insurer created its master policy.

“I could analyze and see where the provisions weren’t as clear as they could have been or were favorable to the mortgage insurer not the lender,” Corso says.

Of course, National Mortgage Insurance has jumped into the business at a time when credit is tight, defaults have ebbed and lenders have to ensure that the borrower has the ability to repay the loan. Since it also has no legacy claims to pay, it can entice banks with better terms.

Limiting lender liabilities is part of an overall effort to reduce risk and get lenders to make more loans. In January, the Federal Housing Finance Agency, which oversees Fannie and Freddie, said it would not ask banks to buy back loans for borrowers that have made 36 months of consecutive mortgage payments.

National Mortgage Insurance also is writing policies at a time when private mortgage insurance is significantly less expensive than government-backed loans from the Federal Housing Administration.

In April, the FHA increased its mortgage insurance premiums for the third time in two years, and starting next month it will require that borrowers pay mortgage insurance premiums for the life of the loan. (Homeowners with loans backed by Fannie and Freddie can cancel their mortgage insurance once their debt-to-income ratio falls below 78%.)

The price advantage over FHA means that borrowers will increasingly turn to Fannie and Freddie, which requires private mortgage insurance from borrowers who do not have a 20% down payment – and that could prove to be a windfall for insurers.

Alfred King, a spokesman at Genworth Financial (GNW), says private mortgage insurance is “making steady progress in regaining market share and volume from FHA.”

Since banks and mortgage lenders typically select the insurer on loans with less than 20% down payments, “banks can pass this mortgage insurance pricing advantage on to customers in the form of lower payments,” King says.

Shuster had been president of international and strategic investments at PMI Group, but was forced to wind down its overseas operations when the financial crisis hit. PMI stopped writing new insurance in August 2011 and currently is operating under the control of the Arizona Department of Insurance. Two other insurers, Triad Guaranty and Old Republic International, also stopped writing policies.

Last year, Shuster teamed up with Jay Sherwood, a former partner at hedge fund Eastbourne Capital Management, one of the largest shareholders of Milwaukee-based private insurer MGIC Investment (MTG). They raised $550 million in private capital and bought an insurance technology platform. They intend to take National Mortgage Insurance public by yearend. The firm says it can support $30 billion in mortgage loans to 150,000 borrowers.

Listings that turn you off

Kenneth R. Harney Apr 26, 2013

WASHINGTON — With full-fledged sellers’ markets underway in dozens of metropolitan areas around the country, new research has found curious statistical patterns emerging: Even in cities where listings get multiple offers within days or hours, significant numbers of homes are sitting on the market for six months, 12 months or more with no takers.

Call them turnoff listings. Despite roaring sales paces all around them, for one reason or another these houses send shoppers scurrying away, often because of mispricing, excessive restrictions on access to buyers and agents, failure to clean or make repairs, and a variety of other marketing bungles.

Researchers at Trulia, a real estate listings site, say the existence of large numbers of unsold houses in the midst of high-activity markets is more common than generally assumed. Jed Kolko, chief economist for Trulia, suggested that “even in the tightest markets, there is a ‘long tail’ of homes languishing” unsold for extended periods.

For example, in one of the fastest-paced sales areas in the country, San Jose, Calif., — where the median time from listing to sale is just 20 days

Bank windows open a bit wider

By KENNETH R. HARNEY 04/19/2013

Using your home as an ATM no longer is a financial option, but the tools that allowed owners to pull out massive amounts of money during the boom years – equity credit lines and second mortgages – are making a comeback.

Banking and credit analysts say the dollar volumes of new originations of home equity loans are rising again – significantly so in areas of the country that are experiencing post-recession rebounds in property values. These include most of the Atlantic coastal states, the Pacific Northwest, California, Arizona, New Mexico, Texas and parts of the Midwest.

Not only have owners’ equity positions grown substantially on a national basis since 2011 – up by an estimated $1.7 trillion during the past 18 months, according to the Federal Reserve – but banks increasingly are willing to allow owners to tap that equity. Unlike during the credit bubble years of 2003-06, however, they aren’t permitting owners to go whole hog – mortgaging their homes up to 100 percent of market value with first, second and even third loans or credit lines.

Now major lenders are restricting the combined total of first and second loans against a house to no more than 85 percent of value. For instance, if your house is worth $500,000 and the balance on your first mortgage is $375,000, you’d likely be limited to a second mortgage or credit line of $50,000. Contrast this with 2007, the high-point year of home equity lending, when many lenders offered so called “piggyback” financing packages that allowed 100 percent debt without private mortgage insurance. A buyer of a $500,000 house could get a $400,000 first mortgage and a second loan of $100,000.

That ultimately didn’t work well for the banks. During the third quarter of 2012 alone, according to federal estimates, banks wrote off $4.5 billion in defaulted equity loans, often in situations where homeowners found themselves underwater and behind on both first and second loans. In such a situation, second mortgages become essentially worthless to the bank, since in a foreclosure the holder of the first mortgage gets paid off first. On underwater foreclosures, the second loan holder is left holding the bag.

Lenders this spring are also much pickier on credit quality than they were as little as six years ago. If you’ve got a delinquency-pocked credit history, and you want to pull out a substantial amount of equity using a credit line, don’t count on getting anywhere near the best rate quotes or terms available.

To illustrate, say you own a house worth $600,000 in Los Angeles with a $400,000 first mortgage balance, and you want a $100,000 equity credit line. Wells Fargo’s online equity loan calculator quoted a floating-rate “home equity account” for 10 years at 4.75 percent in mid-April for borrowers with “excellent” credit. The site defines excellent as meaning no missed payments and no delinquencies on your credit report. For a borrower with “average” credit seeking the same $100,000 credit line, by contrast, the rate jumps to 7.5 percent. The term “average” means you’ve got a credit history with delinquencies and perhaps other problems.

Matt Potere, Bank of America’s home equity product executive, said in an interview that his institution has no specific cutoffs for FICO credit scores, preferring instead to look at multiple factors simultaneously – combined loan to value (CLTV), full credit history of the applicant and the location of the property. Location factors into pricing, Potere said, because some markets have historical patterns of high volatility – prices spiral upwards for a while, then plummet. This raises the potential costs to the bank if a borrower goes delinquent during a period when values are in decline. Some jurisdictions also factor special add-on costs into quotes, such as mortgage taxes, and these can raise pricing quotes slightly.

Despite the multibillion-dollar losses that Bank of America and other large lenders have racked up on their equity loan portfolios from the bust and recession period, executives such as Potere are convinced that this time around, things will be different thanks to smarter underwriting.

Bottom line: If you have equity in your house, a need for cash in a lump sum or credit line and can get through the underwriting hoops and snares set by loss-leery lenders, go for it. Rates are low and the bank windows are opening again.

Just not as wide as they once did.

With market booming, brokers resurrect sales techniques

Kenneth R. Harney

WASHINGTON — They’re back after barely a decade: Escalation clauses in real estate contracts, “naked” contingency-free offers and lowball-priced listings designed to pull in dozens of bidders and turn routine sales transactions into auctions.

These are all techniques last seen with frequency during the frothiest months of the housing bubble in 2004-05, when prices were rising at double-digit rates, buyers thought they couldn’t lose money in real estate, and mortgage financing was available to anybody who could sign a loan application. Now they are reappearing in some of the hottest sellers’ markets from coast to coast — the byproduct of severe shortages in houses listed for sale combined with strong demand by qualified purchasers. Nationwide, according to surveys of 800-plus local markets by Realtor.com, inventories are down by 16 percent from year-ago levels. But in the hottest areas, listings are down by double or even triple that and prices are moving up fast.

Buyers, meanwhile, are out in droves, scanning newspapers and online realty sites for the latest listings, and signing up for alert services provided by realty firms. In the San Francisco Bay area, for example, agents say that realistically priced new listings are attracting dozens — sometimes even hundreds — of shoppers to open houses and stimulating bidding competitions with 30 to 50 or more participants.

Bidding wars are also increasingly frequent on well-priced listings in Washington, D.C., and its Maryland and Virginia suburbs, much of California, Seattle, Phoenix, Las Vegas,
Richmond, Va., Boston and parts of Florida, among others. In a handful of fiercely competitive areas, some listing agents reportedly are even restricting buyers’ access to properties to narrow time windows — say, a few hours on Saturday and Sunday — in order to fan the flames.

To get a leg up in such situations, some buyers and their agents are using techniques that can be effective, but that also come with drawbacks and snares. Among them:

L Contingency-free and contingency-light offers

Carl Medford, an agent with Prudential California Realty in the San Francisco East Bay market, says these are almost routine for buyers determined to win a bidding competition. He calls them “unprotected” contract offers. Essentially the idea is to strip away some or all of the customary contingencies in an offer that might irritate a seller or render the buyer’s bid less attractive. The financing contingency, which makes the entire transaction dependent on the buyer obtaining a satisfactory loan and appraisal, often is the first to go if the bidder is confident of qualifying for a mortgage, has been preapproved or is willing to pay what could be a lot more than market value.

Many buyers are also willing to delete the inspection contingency, which Medford considers much more risky, since the bidder agrees to fly blind with no way out of the deal if costly defects — tens of thousands of dollars’ worth, potentially — later arise.

L Escalation clauses

These are add-ons to contract language that keep bidders in the competition, even when the price soars well beyond the original asking amount. Typically the bidder agrees to match and exceed any verifiable, bona fide competing offers by set increments ­— say, $500 to $1,000 — up to some to some maximum amount. Tom Conner, an associate broker with RE/MAX Gateway in Gainesville, Va., says “we’re seeing them all the time now” in multiple-offer situations. The upside: Properly used, they work. Bidders with the highest maximums often get the house. Downside: If you need a mortgage, the appraisal could be a problem because it’s likely to come in lower than the purchase price. Be prepared to throw extra cash into the deal upfront.

L Lowball listings

Rather than list a house at the price that comparable recent sales in the area indicate it’s worth — say $495,000 ­— the sellers, advised by their agent, cut that to $479,000, hoping to stimulate a bidding war. Astute shoppers immediately spot the house as a “bargain,” and multiple competing offers push the final price to $520,000.

Good for the sellers, right? Probably. They get top dollar. But the ultimate buyers end up committed to a contract requiring them to pay what may be $25,000 over the likely current appraisal value — and that could have negative consequences for both the buyer and the seller.

A Boom Market Reappearing

By Kenneth R. Harney Posted 04/12//2013

WASHINGTON – They’re back after barely a decade: Escalation clauses in real estate contracts, “naked” contingency-free offers and lowball-priced listings designed to pull in dozens of bidders and turn routine sales transactions into auctions.

These are all techniques last seen with frequency during the frothiest months of the housing bubble in 2004-05, when prices were rising at double-digit rates, buyers thought they couldn’t lose money in real estate, and mortgage financing was available to anybody who could sign a loan application. Now they are reappearing in some of the hottest sellers’ markets from coast to coast – the byproduct of severe shortages in houses listed for sale combined with strong demand by qualified purchasers. Nationwide, according to surveys of 800-plus local markets by Realtor.com, inventories are down by 16 percent from year-ago levels. But in the hottest areas, listings are down by double or even triple that and prices are moving up fast.

Buyers, meanwhile, are out in droves, scanning newspapers and online realty sites for the latest listings, and signing up for alert services provided by realty firms. In the San Francisco Bay Area, for example, agents say that realistically priced new listings are attracting dozens – sometimes even hundreds – of shoppers to open houses and stimulating bidding competitions with 30 to 50 or more participants.

Bidding wars are also increasingly frequent on well-priced listings in Washington, D.C., and its Maryland and Virginia suburbs, much of California, Seattle, Phoenix, Las Vegas, Richmond, Va., Boston and parts of Florida, among others. In a handful of fiercely competitive areas, some listing agents reportedly are even restricting buyers’ access to properties to narrow time windows – say, a few hours on Saturday and Sunday – in order to fan the flames.

To get a leg up in such situations, some buyers and their agents are using techniques that can be effective, but that also come with drawbacks and snares. Among them:

* Contingency-free and contingency-light offers. Carl Medford, an agent with Prudential California Realty in the San Francisco East Bay market, says these are almost routine for buyers determined to win a bidding competition. He calls them “unprotected” contract offers. Essentially the idea is to strip away some or all of the customary contingencies in an offer that might irritate a seller or render the buyer’s bid less attractive. The financing contingency, which makes the entire transaction dependent on the buyer obtaining a satisfactory loan and appraisal, often is the first to go if the bidder is confident of qualifying for a mortgage, has been preapproved or is willing to pay what could be a lot more than market value.

Many buyers are also willing to delete the inspection contingency, which Medford considers much more risky, since the bidder agrees to fly blind with no way out of the deal if costly defects – tens of thousands of dollars’ worth, potentially – later arise. Tracy King of Teles Properties in northeast Los Angeles says she knows of buyers who have waived the inspection contingency and later discovered sewer lines clogged with roots and a chimney cracked so badly that it was condemned.

* Escalation clauses. These are add-ons to contract language that keep bidders in the competition, even when the price soars well beyond the original asking amount. Typically the bidder agrees to match and exceed any verifiable, bona fide competing offers by set increments – say, $500 to $1,000 – up to some to some maximum amount. Tom Conner, an associate broker with RE/MAX Gateway in Gainesville, Va., says “we’re seeing them all the time now” in multiple-offer situations. The upside: Properly used, they work. Bidders with the highest maximums often get the house. Downside: If you need a mortgage, the appraisal could be a problem because it’s likely to come in lower than the purchase price. Be prepared to throw extra cash into the deal upfront.

* Lowball listings. Rather than list a house at the price that comparable recent sales in the area indicate it’s worth – say $495,000 – the sellers, advised by their agent, cut that to $479,000, hoping to stimulate a bidding war. Astute shoppers immediately spot the house as a “bargain,” and multiple competing offers push the final price to $520,000.

Good for the sellers, right? Probably. They get top dollar. But the ultimate buyers end up committed to a contract requiring them to pay what may be $25,000 over the likely current appraisal value – and that could have negative consequences for both the buyer and the seller.