Chicken Little Uses PMI Insurance
Posted by Jonathan J. Miller -Saturday, October 22, 2005, 1:24 PM
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There has been a lot of coverage on the PMI Market Risk Index [Big Picture] this week and while I find it interesting, I have issues with the sincerety of the PMI report altogether since they are in business to sell PMI insurance. PMI insurance is usually required for mortgages where there is less than a 20% down payment. It is designed to protect lenders (not homeowners) on the portion of the value of the collateral above the 80% threshold should a borrower put less than 20% down. It does not cover the entire mortgage. I believe there is certainly increased risk to the lender associated with a lower down payment, but this is generally factored into the underwriting analysis. [Note: Underwriters, I'd love to hear your comments about this.]
The Homeowners Protection Act of 1998 allowed homeowners to cancel their private mortgage insurance if rising markets made their loan to value ratio 80% or less. Before that, homeowners would be saddled with the extra monthly payment (not tax deductable) for the life of the original loan. The use of private mortgage insurance has likely diminished as the housing boom has allowed people to get out from under PMI, namely due to this legislation.
Since insurance is about measuring risk, and there has been a lot of media coverage of a cooling housing market [AP/Businessweek] this fall, this PMI Market Risk Index [REJ] report will be prominently covered at each release as Janet Morrissey of Dow Jones Newswires did this week. Here are some of the interesting points she makes in the article:
PMI calculated its Risk Index by tracking and comparing home-price appreciation, labor markets, employment levels, affordability and the percentage of monthly income that a mortgage takes up in each market. The Risk Index estimates the chances of a price correction of any size in the next two years.
Click here for the PMI report [PDF]
Boston, San Diego, Long Island, N.Y., Santa Ana, Calif., and Oakland, Calif.have more than a 50% chance of a market correction in the next two years. New York City only ranked 14th, with a 33% chance.
On a national level, the risk of any size price correction, no matter how large or small, in the 50 largest housing markets moved from a 21.3% chance last quarter to 21.8% chance this quarter. Thats a 0.5% increase in risk, yet this is now widely covered in the media, more so than in recent quarters. I am not trying to sound like an advocate of the national housing market here, but a 0.5% increase? a total of 21.8% risk? That doesn’t seem commensurate to the coverage of the report.
PMI just added a Valuation index, which is based on home-price appreciation, the cost of a 30 year fixed mortgage and the level of demand in each market. I am not sure how they measure demand and am not sure why the affordability is based on 30 year fixed financing. Interestingly, New York City is not on the top of the list.
Source: Dow Jones
