Private insurers are considering a request by U.S. officials to guarantee mortgages for veterans — the fastest growing part of the market.
The Department of Housing and Urban Development is urging mortgage insurers that rely on Fannie Mae and Freddie Mac for business to offer supplemental protection for lenders to military members and veterans. Only 25 percent of VA loan amounts are backed by the Department of Veterans Affairs — a limit that keeps some firms from fully participating in the program, Ginnie Mae President Ted Tozer said.
As soldiers returned to America after more than 2.6 million served overseas since 2001, and the cost of Federal Housing Administration insurance jumped, the VA share of home lending has soared, accounting for almost 9 percent in the second quarter, at least a 20-year high. Insurers including American International Group Inc. (AIG:US) and MGIC Investment Corp. (MTG:US) are looking at these loans as their role in the mortgage market expands.
“It’s something I’m definitely interested in exploring,” Donna DeMaio, who runs AIG’s United Guaranty mortgage-insurance unit, said in an interview at a Mortgage Bankers Association conference last week. “I’m really interested in new ways we can help produce access to credit.”
The 25 percent cap on VA insurance “leaves a lot of small lenders awfully exposed and reluctant to offer veterans credit under this initiative,” HUD Secretary Julian Castro said during his speech at the conference in Las Vegas. Getting another layer of protection would make them “feel confident when offering these loans — giving more of our nation’s heroes a chance to buy a home in the country they risked everything to protect.”
When smaller lenders do offer VA loans, they often sell the servicing contracts to larger lenders to get rid of the default risk, said Tozer of Ginnie Mae, which guarantees $1.5 trillion of bonds mostly backed by FHA and VA loans. That leaves those smaller lenders with a diminished role in the VA market, reducing competition that can cut borrowing costs and limiting underwriting flexibilities.
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Mike Frueh, director of the VA’s loan guaranty service, said that while the 70-year-old program has about 1,500 firms making loans that it guarantees, the agency supports using extra insurance to draw in more. The reduction of lenders’ money at risk, a key part of VA lending since its creation, would be addressed by the insurers wanting “to make sure they’re making a safe bet.”
Robert Van Raaphorst, a spokesman for the Mortgage Bankers Association, said that the group couldn’t yet comment on the idea.
VA lending, which doesn’t require a down payment, has expanded as the U.S. draws down troops after more than a decade of combat in Iraq and Afghanistan. The VA has also taken business from FHA after that agency, which guarantees loans with down payments as low as 3.5 percent, increased the cost of its insurance to rebuild its depleted fund.
VA loans accounted for $26.5 billion or 9 percent of mortgages made in the second quarter, up from 6.9 percent in all of 2013 and less than 2 percent a decade ago, according to Inside Mortgage Finance, a trade publication. The loans were used to finance 8.1 percent of all home purchases in the three months through September, an increase from 3.9 percent in the three months through May 2010, according to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey.
Higher FHA insurance premiums are also pushing borrowers to get loans from government-controlled Fannie Mae (FNMA:US) and Freddie Mac. They require loans with less than 20 percent down payments to carry mortgage insurance that covers the initial losses.
FHA borrowers must now pay as much as 1.35 percentage point in annual mortgage-insurance premiums, along with an upfront fee of 1.75 percent of the loan balance. Prior to October 2010, borrowers paid an annual amount of 0.55 percent.
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“As more business shifts to the private market and away from the FHA,” the mortgage insurers are benefiting, MGIC Chief Executive Officer Curt Culver said on an Oct. 15 conference call with analysts.
The industry backed 14 percent to 15 percent of new loans last quarter, he said. That’s up from less than 5 percent in 2009 and 2010, according to data from Inside Mortgage Finance and the Mortgage Bankers Association.
“As private capital we certainly would like to explore as many ways as possible to prudently participate in the housing recovery and expansion,” including supplemental VA loan insurance, Mike Zimmerman, a spokesman for Milwaukee-based MGIC, said in an e-mail.