RJ’s Spin on Mortgage Insurance Ignores Key Facts

A recent article in the LVRJ starts off promising:

You can’t take one more story about falling home prices in Las Vegas.

You’ve heard it all, from the forecasters at Forbes and Money magazines to those economists at UCLA and National City Corp. The Standard & Poor’s/Case-Shiller Home Price Indices, numbers from the Office of Federal Housing Enterprise Oversight, the parade of bleak stats from local firms such as SalesTraq and Home Builders Research — what else can anyone possibly say about the local real estate market? Prices fell a lot… Yada, yada, yada.

But just before you think that the RJ has turned over a new leaf and written something worthy of a a guest post here at FrothingDeveloper, they hit you with the hook:

…But try to sit still for just one more report. This one’s especially important because it comes from a major national mortgage insurer, a company that protects banks from default losses. Keying in on what mortgage insurers think of the local market can reveal just how hard a time consumers might face in obtaining home loans, and it can help predict whether a cold borrowing climate might heat up anytime soon.

The article jumps quickly to the dark side, and makes an argument that stricter guidelines for private mortgage insurance, which lower maximum loan-to-value ratios from 97% to 90%, mean that housing conditions are worsening. Private mortgage insurance (PMI) is required for most loans when a borrower puts down less than 20%.

Before diving into the details, the argument is flawed on it’s face. The requirements for private mortgage insurance have historically followed the lead of the mortgage industry, and have typically lagged credit trends by several months. According to the RJ, underwriters PMI and MGIC didn’t start to deny protection on riskier loans until 2007, when they had already taken a significant hit. The argument that the market must now worsen because PMI requirements are currently strict is no more valid than an argument that the market was in good shape at the top when PMI requirements were looser.

Those of you following the markets or this site closely known that Fannie Mae is removing their declining markets requirements for LTV ratios effective June 1, taking minimum down payments back to 3-5% across the country, including Las Vegas. Yes, these loans will still require insurance, but private mortgage insurers will feel significant pressure to follow Fannie Mae by lowering their restrictions, and the smart money is betting that they will do so within the next few months.

But let’s take a worst case scenario, and assume that PMI underwriters don’t follow Fannie Mae’s lead. Are we in for another wave of housing doom spurred by the inability of people putting down less than 10% to get loans? The answer, fortunately, is a resounding no.

One key reason, which the RJ piece completely ignores, is the ready availability of FHA loans. These loans allow as little as 3% down, have increased limits to $417,000, and don’t even require private mortgage insurance. Buyers who aren’t able to put down the 10% required for PMI have an excellent option in FHA loans. Those who need a lower down payment option or have less than perfect credit are turning to FHA loans for their borrowing needs, not just walking away from the housing market as the article suggests.

The article goes on to say:

Las Vegas, with its nation-leading foreclosure rate, its 20.2 percents decline in home prices in the first quarter, and a 22,000 home stockpile of resales on the market is raising more red flags than the Gulf Coast in hurricane season.

Let’s start with foreclosures. It’s no secret that Las Vegas has a high number of foreclosures. But what is a secret if you aren’t watching the trends carefully is that homes going into foreclosure and being put on the market at “foreclosure” prices are garnering multiple offers, sometimes as many as 12-15 for one property.

So while housing prices may have declined 20.2%, there is ample evidence that prices, at least those set by an efficient market, are stabilizing.

Inventory is the final piece of the puzzle, and the RJ cites Las Vegas’ 22,000 available homes as an indicator that the market still has a long way to go towards recovery. Yet the piece fails to mention that inventory is down by 7,000 units — more than 20% from its high of 29,051 in September, 2007. That’s the largest drop in inventory Las Vegas has ever experienced. It speaks volumes about the speed with which prices have adjusted to market levels, and the pent-up demand from buyers waiting to purchase until prices reached those levels.

So while the tougher requirements for PMI aren’t necessarily positive, they’re already old news and certainly won’t have anywhere the impact the RJ thinks they will.

Read the full RJ story here.


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