Introduction to Mortgage Insurance Alternatives

08/12/2013

Why does MI make Sense?

• Benefits of MI› Competitive

› Cancelable

› Simple

› Flexible

› Support

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Objectives

• Understand the purpose of mortgage insurance and the various types.

• Learn basic criteria for selecting a private mortgage insurance company.

• Understand the role private mortgage insurers play in the mortgage industry.

• Comparison of coverages and costs for private mortgage insurance.

• Private mortgage insurance characteristics.

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08/12/2013

The Purpose of MI

• In today’s challenging economic environment, MI is the most secure way to help borrowers qualify for homes sooner.

• MI also helps investors (Green Tree) mitigate exposure, reduce volatility and strengthen their portfolios.

• On the borrower side, MI makes possible a range of safer and more secure loan structures. Borrowers have just one loan and one predictable monthly payment.

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08/12/2013

What’s in it for You?

• Set yourself apart• Position MI as a product niche• Earn satisfied customers• Improve referral base• Receive compensation on entire 1st loan

amount

• Think MI with every loan request above 80%!

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08/12/2013

What We Will Cover Today

• Current Market Snapshot

• What is MI? Opportunity

• MI is simple, safe & smart Excellent

› Originator and borrower benefits

• MI Calculability

• Premium plans Options

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08/12/2013

Current Market Snapshot

• Market appreciation is slow . . . at best

• Change in recent traditional wisdom› “We’ll just refinance you out . . .”

• Exotic products coming up to 1st payment adjustment› Payment shock› Not enough equity yet

• Non conforming B & C Market Shift

• 80/20 blended primary purchases essentially non-existent

• Speculation on the future› Rates up› Fewer home sales

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• Mortgage Insurance is utilized for home loans with less than 20%down payment

• Mortgage Insurance protects lenders against the additional risk of borrower default due to low down payment

• Enables lenders to accept down payments lower than they would normally accept because exposure is reduced

• Extends homeownership opportunities for first-time and low-to-moderate-income homebuyers

What is Private Mortgage Insurance?

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08/12/2013

What is protected?

• Mortgage Insurance provides mortgage payment default protection for the lender on individual loans.

• MI is insuring a portion of:› unpaid loan principal› delinquent interest› certain expenses associated with the default and subsequent

foreclosure.

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When & How much MI is required?Lender Decides

• LTV’s of 80.01% and above.• Coverage Percentage

› How much “exposure (risk)”?› The lender assess the risk components› The amount of Coverage that is required, loan-per-loan,

is determined by the lender.

• Exposure (risk)› Is the portion of the loan that the loan holder is

responsible for after the MI company has paid the coverage amount in case of a claim.

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08/12/2013

Another Way of Looking at It

• Value/Price $100,000• Loan Balance $ 90,000• Coverage (%) 25%

• $90,000 x 25% = $22,500 (MI Coverage $)

• Result:› Loan Balance $90,000› MI Coverage $22,500› Lender Exposure $67,500

$100, 000 PURCHASE PRICE

$10,000 Downpayment

$22,500 MI Coverage

$67,500 Lender/Investor Exposure

$90,000 1st Mortgage 90% LTV

25% Coverage

OR

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08/12/2013

Private Mortgage Insurance is NOT

• Credit Life Insurance› Pays off the mortgage in the event a borrower dies

• Credit Disability Insurance› Pays off the mortgage in the event a borrower becomes

disabled

• Job Loss Insurance (Payment Protection Insurance)› Pays the mortgage payment in the event of unemployment (job

loss, medical)

• Hazard Insurance › Protects homeowner from losses due to fire, liability and theft

• Fraud or Appraised Value Coverage› MI does not cover fraud in the loan origination or assure the

value of the property as evidenced by the appraisal

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08/12/2013

Benefits of MI: Originators

• One loan› One loan to originate, process, close & service

› One loan to sell

› Typically results in faster home buying process

• Portfolio management

› Manages default risk

› Loss mitigation tool

• Increase business

› High LTV qualifies more borrowers

› Single lien provides future sales opportunities

› Satisfied borrowers lead to referrals and/or repeat business

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• Simple with only one loan to repay

› One check to write each month

› Borrower-paid MI is cancellable*

• Safe homeownership

› Manages interest rate & payment risk

› Single lien preserves access to future equity

• Smart financial options

› Higher LTV gets borrowers into a home sooner

› Interest paid on financed MI may be tax deductible**

*Subject to the Homeowner’s Protection Act of 1998.

**May not be tax deductible for all borrowers: borrowers should consult tax advisor.

Benefits of MI: Borrowers

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08/12/2013

MI cancelled @ 78% LTV*

• Borrower-paid MI for loans originated on or after July 29, 1999

• Automatic termination

› 78% LTV of original value

• Borrower-initiated cancellation

› 80% LTV of original value

› No other mortgage liens

› No decline in property value

• Borrower must be up to date on payments

• No refinance of first loan necessary

*Subject to the Homeowner’s Protection Act of 1998.

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COVERAGE AND COSTSCOVERAGE AND COSTS

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Components of an MI Premium

• Required to determining an accurate MI premium– LTV– Coverage Level – Set By Lender Loan Program Guide– Loan Product Type – Fixed, ARM– Term of loan– FICO– AUS Decision– Transaction Type– Occupancy– Type of MI premium

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08/12/2013

Steps for Calculating MI1. Select the Premium Option2. Select the LTV Coverage3. Select the Loan Type

• Fixed?• ARMs with Annual Cap of 1% or Less (includes Temporary Buydowns)?• ARMs with Annual Caps Greater than 1%?

4. Within the Loan Type, Select from Two Loan Terms• 30 Year Term?• < 25 Years?

5. Other Factors to Consider• Refundable vs. No Refund• Premium Adjustments

6. Information on Renewal Premiums• Zero Monthly, Monthly, Level Annual• Standard Annual

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08/12/2013

Costs and Payments• Cost to Borrower:

› Variety of plans: Single paymentsMonthly onlyUp-front plus monthly (Split Premiums)

• Payment of Premiums• Can be added to loan amount or• Paid in cash by:

• Borrower• Seller• Or lender

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08/12/2013

Down Payments and Cancellation

• Down Payment Required• 3% is allowed under most conforming programs.

• Cancellation Policy• Can be cancelled if lender/investor approves.

Some plans allow refund of premium in the event of pre-payment.

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08/12/2013

How to Select a Private Mortgage Insurance Company

• Financial stability; ability to pay claims.• Underwriting criteria.• Competitiveness of rates; special

programs.• Claims-paying reputation.• Automation capability: speed and service.

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MORTGAGE INSURANCE MORTGAGE INSURANCE ALTERNATIVESALTERNATIVES

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Traditional Borrower-Paid Mortgage Insurance

• No MI premiums at closing

› Provided Lender selects no Upfront Premium

• First MI payment due with first mortgage payment

• Coverage from loan closing

• Cancellation2323› No refund

› Borrower’s overall monthly payment lower

• Traditionally MI plan of choice

• Borrowers will start building equity in their property rather than spend years saving up down payment money or depleting savings and/or retirements accounts.

• Pro

› Simplicity- one payment per month

› Option to Cancel

• Con› In some cases, the payment with MI may be high than available alternatives

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08/12/2013

Lender Paid Single Premium (LPSP) MI

• Requires the mortgage insurance policy to be fully paid at closing in one single lump sum payment by the Correspondent.

› The lender usually recoups the cost of the MI premiums by building it into the loan interest rate or origination fee (or acombination of both).

• All files submitted for purchase must contain a copy of the mortgage insurance certificate.

• All MI Providers are Acceptable providers for LPSP

• Check Product Matrix Box #32 for LPSP eligibility

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08/12/2013

LPSP Requirements

• Borrowers must have a minimum 660 credit score

• 30 year and 40 year terms available

• Loan must receive a FNMA Approve or FHLMC Accept recommendation

• Loans that receive an FNMA Expanded Approval, Refer with Caution or FHLMC LP Caution are not eligible.

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08/12/2013

Split Premiums

• What are they?› Borrowers have the option to finance a portion of the mortgage insurance premium,

or have it paid by a third party. The remainder of the premium is then paid as an annual renewal premium. Since the premium is only due yearly most servicers do escrow.

• Benefits to the Borrower:› Lower monthly payments.

› Potential for a third party to pay the first year premium, (which lowers the MI costs.)

› Financing the first year MI premium lowers closing costs.

› Because the financed premium increases the mortgage amount slightly, borrowers have a potentially higher tax deduction for mortgage interest. FinanceAbles Split/Premium are fully refundable – borrowers can receive a refund on the premium paid during the year the refund is requested.

› The home buyer’s equity position stays secure, enabling a second mortgage or home equity line of credit later on.

› Potential for MI tax-deductibility.

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08/12/2013

Cost Comparison

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Assume a loan with the following characteristics$250,000 Loan Amount 95% LTVFICO of 700+ Requires 30% CoverageMonthly cost of MI: $195.83

08/12/2013

Split Premium Costs

•For the 75 bps option•Up front would be $1875 •Monthly renewal would be $150

•For 100 bps option•Up Front $2500•Monthly drops to $127

•For 125 option•Up Front is $3,125•Monthly is $106

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Lender Paid Mortgage Insurance (LPMI)

• The idea of having lender paid mortgage insurance is relatively simple: your borrower accepts a higher interest rate and the investor pays for the mortgage insurance.

• And when you do the math, it is possible that getting LPMI on the loan could save you a chunk of money each month on your borrowers monthly mortgage payment.

• One of the problems with LPMI is that not all investors offer intoday’s mortgage market. LPMI used to be a much more popular product a few years ago but as options have been limited these products are tough to find.

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LPMI Example• Let’s assume the following:

› $200,000 purchase price› 10% down payment› 750 credit score› 30 Year fixed rate 4.875%

• Option 1 – with standard monthly MI:› $971 Principal & Interest› $84 Monthly mortgage insurance› =$1055 Total

• Option 2 – Borrower takes a higher rate of .375% or 5.25% in exchange for no monthly MI

• $1013 Principal & Interest• =$42 monthly savings

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LPMI: Pros and Cons• Pro

› Tax Deductibility› Simplicity- one payment per month

• Con› No Option to cancel› If the borrower is going to make large principle payments or will be

moving within a short period it is not a good option

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FAQ’s

• How long will it take before I can cancel my MI?› This will depend on the loan product selected for the

1st lien loan and any state or investor guidelines.

• Which option is better for my client?› Depends on their needs and how they want to handle the

repayment.

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WHY FINANCED MI?WHY FINANCED MI?

Tax Deductible

AffordableProfitable

Refundable

SimpleMarketable

Low Cost

Stable

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Objectives

• Explain how financed MI works.• Outline benefits of the product:

› Lender.

› Borrower.

• Provide comparisons to other products:› Borrower-paid monthly MI.

• Promote lender marketing opportunity:› 3/8 rate advantage.

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08/12/2013

Financed MI

• Borrower or third-party pays a one-time, up-front single MI premium.› Added on top of the loan amount and financed by the borrower OR

› Paid by a seller, builder, gift, or other third party OR

› A combination of both.

› Paid in full at closing.

› Refundable for the first 5 years.

› Remember to verify investor’s maximum loan limits for ‘sale ability’. For example, when selling to Fannie Mae/Freddie Mac maximum loan amount including financed premium can’t exceed conforming loan limit.

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08/12/2013

Calculating the Financed Premium

• Loan amount $250,000• LTV 90%• Coverage 25%• Product Fixed• Amortization 30 Years• Loan type Purchase• MI Factor 2.30%

$250,000X .023$5,750

$250,000+ 5,750

$255,750

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08/12/2013

Benefits to the Lender

• Increased origination volume.• Lower cost alternative to many combos.• Easier borrower qualification.• One loan to process and close.• One set of underwriting guidelines.• One standard MI rate on all FICOs 660+

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Benefits to the Lender (cont’d)

• Higher loan amounts mean higher commission.• Marketing opportunities.• Competitive edge – be different (isn’t everyone talking

standard monthly?).• Ease in servicing.

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Benefits to the Borrower

• One loan, one payment.• Increased affordability.• Lower mortgage payments.• Potential for MI tax-deductibility.• Reduced closing costs when MI is financed.• Refundable.• May take a second loan sometime after closing.• Potential for third-party to pay “life of the loan”

MI.

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08/12/2013

Financed MI vs. Monthly MICompare the Savings!

Financed MI• 2.30% for 90% LTV• Loan $255,750 @ 5.00%

• P&I = $1,372.92 • MI = 0.00• Total = $1,372.92• Savings:

$ 144.13 monthly$1729.56 annually

Standard Monthly MI• .84% for 90% LTV• Loan $250,000 @ 5.00%

• P&I = $1,342.05• MI = 175.00• Total = $1,517.05

Both examples assume a 30-year amortization.40

LENDER MARKETING LENDER MARKETING OPPORTUNITYOPPORTUNITY

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The 3/8 Rate AdvantageYour competition may be 3/8 lower in rate but…. your payment with financed MI will STILL be lower. Let’s compare the results …

Standard Monthly MI• .84% for 90% LTV• Loan $250,000 @ 5.00%

• P&I = $1,342.05• MI = 175.00• Total = $1,517.05

Financed MI• 2.30% for 90% LTV• Loan $255,750 @ 5.375%

• P&I = $1,432.13• MI = 0.00• Total = $1,432.13• Savings:

$ 84.92 monthly$1,019.04 annually

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THE ADVANTAGES OF THE ADVANTAGES OF CONVENTIONAL LOANS CONVENTIONAL LOANS

WITH MI VS. FHAWITH MI VS. FHA

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Ratio Issues?Conventional Loan with Single Premium

Loan Scenario:$250,000 Loan 680 FICO90%LTV25% Coverage required30 Year Fixed rate

FHA Loan requiring MIP

1.75$4,375

Upfront Premium 1.75*$4,375

0.00$0.00

Monthly Premium 1.20%$250.00

$4,375 Total MI paid over 5 yrs $19,375Standard Mortgage insurance saves borrower $15,000 vs. FHA

*FHA premium is based on HUD Mortgagee Letter 2012-04 announcing upfront MIP increase to 1.75% andan annual increase to 1.20% for loans with a FHA case number ordered on or after 04.09.12

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08/12/2013

Borrower tight on cash to close?

Conventional Loan with Monthly MI

Loan Scenario:$250,000 Loan 680 FICO90%LTV25% Coverage required30 Year Fixed rate

FHA Loan requiring MIP

$0 Upfront Premium 1.75*$4,375

0.62$129.17

Monthly Premium 1.20%$250.00

*FHA premium is based on HUD Mortgagee Letter 2012-04 announcing upfront MIP increase to 1.75% and an annual premium of 1.20% for loans with a FHA case number ordered on or after 04.09.12

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08/12/2013

So, Mortgage Insurance Is…

• The Renewed High LTV Alternative• MI may be Cancelable• Easy to use• Fee income earned on total first loan amountSIMPLESAFESMART

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08/12/2013

Green TreeMortgage Insurance Alternatives

Questions?

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08/12/2013

Further Information

• Refer to:– Green Tree Website

• www.gtcorrespondent.com– The Correspondent Funding Client Guide– Product Matrix

• Contact:– Client Services

877-700-4622, Option 9Correspondent_Lending@gtoriginations.com

– Your Sales Director or Account Executive

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