Blog: Mortgage Insurance Levels the Playing Field
As we kickoff Financial Literacy Month, we want to take a step back and look at the critical role mortgage insurance (MI) plays in leveling the homebuying playing field.
MI is particularly important for first-time, minority, and low- to moderate-income (LMI) homebuyers who face several barriers to securing a home. Chief among them is record high home price appreciation (HPA). Largely driven by severely limited affordable housing supply, HPA was 18.2 percent from January 2021 to January 2022 according to the Federal Housing Finance Agency’s (FHFA) House Price Index (HPI®). Borrowers are acutely aware of these issues. Nearly 70 percent of respondents to USMI’s 2021 National Homeownership Market Survey said that the lack of affordable housing is one of the most significant homebuying challenges.
As homeownership costs rise, a working paper from Fannie Mae reveals what drives those costs. The paper, “What are the biggest costs of homeownership? (Hint: It’s not what you might think),” highlights the largest contributors are consistently ongoing non-mortgage costs, which collectively are about half of total costs over the homeownership period. These costs include utilities, property taxes, and home improvement expenses. Transaction costs at purchase and sale comprise roughly another 20 percent of total costs. In our homeownership market survey, more than 60 percent of respondents believed that reducing costs for low down payment borrowers is one of the most important issues—and specifically, nearly 60 percent of respondents support ending the government sponsored enterprises’ (GSEs), Fannie Mae and Freddie Mac, loan level pricing adjustments (LLPAs), which were financial crisis era added fees that are particularly burdensome for LMI and minority borrowers. In addition, many consumers do not understand what it takes to be “mortgage-ready,” and mistakenly believe they need 20 percent or more for a down payment to qualify for financing.
Understanding the role of MI and what it takes to be mortgage-ready are critical for both current and future homeowners, as well as policymakers and industry who are working to address some of the greatest challenges facing today’s homebuyers.
First, let’s discuss what MI does.
Private MI enables a borrower to qualify for home financing with a down payment as low as 3 percent, while protecting the lender, government, and taxpayers against the higher risk of default associated with lower down payment loans.
In our homeownership market survey, 45 percent of respondents believed a down payment of 20 percent or more was required and another 30 percent reported they do not know what amount of a down payment is required. However, for 65 years MI has helped more than 35 million families bridge the down payment gap. Securing a loan with MI helps to keep more money in a borrower’s pocket while still ensuring access to affordable and sustainable mortgage credit.
Once MI was explained, 73 percent of survey respondents expressed strong support for access to mortgages with MI in both the conventional and government-backed markets. Respondents view MI as needed and positive as it levels the playing field and provides access to home financing for those who might not otherwise be able to purchase a home due to limited funds for a down payment.
Second, let’s look at the MI options available on the market.
There are generally two types of MI.
1. MI on low down payment conventional mortgages that is backed by private capital. This is generally paid monthly by the borrower and can be cancelled after 20 percent equity in the home is established. There is another form that is factored into the loan’s interest rate rather than being a line item in the monthly mortgage payment.
2. MI premiums on government-backed loans. These include loans insured or guaranteed by the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA), and U.S. Department of Agriculture’s Rural Housing Service (RHS). Government-backed MI cannot be cancelled – it stays on for the life of the loan.
Finally, let’s discuss the benefits of MI.
– Access to a home sooner. Fannie Mae wrote in its working paper that private MI is a “small component of costs, ranging from one to three percent of total costs.” MI dramatically reduces the number of years to save for a down payment. This allows borrowers to keep money in their pockets for larger, unexpected expenses.
– Private MI can be cancelled. Unlike FHA and other government-backed loans, where the insurance, and therefore premiums, stay on the loan for the life of the loan, private MI paid by the borrower can be cancelled, usually within 5 years. This feature reduces the monthly mortgage payment and leads to potential savings over the life of a borrower’s loan.
– MI premiums are tax deductible. In 2019, eligible homeowners received an average deduction of nearly $2,100 according to IRS data. This important deduction supports LMI homeowners. Legislative efforts to restore, make permanent, and expand eligibility for the MI tax deduction are moving forward in Congress with the bipartisan and bicameral Middle Class Mortgage Insurance Premium Act.
– MI protects taxpayers and provides stability to the housing finance system. Private MI, in particular, helps stabilize our nation’s housing finance system by making greater use of private capital to de-risk the GSEs, and lower the exposure and costs to the government and taxpayers. In 2021, loans backed by private MI accounted for more than 43 percent of the insured market, and more than $1.2 trillion in outstanding GSE mortgages had protection from MI coverage.
Private MI enhances the ability of first-time, minority, and LMI homebuyers to purchase homes in an affordable and sustainable way, enabling them to achieve housing stability and build generational wealth. In the last year, private MI helped more than 2 million homeowners purchase or refinance a mortgage. Nearly 60 percent of purchase loans with private MI were to first-time buyers, accounting for nearly 900,000 new homeowners, and more than 40 percent had annual incomes below $75,000. In addition, over 35 million families nationally have benefited from private MI since 1957.