Monday, November 12, 2007

PMI Woes

I don't want my blog to be like some of the other real estate sites that only recycle news stories. If I want to read the news, I'll go to the news sites. However, I like to offer links to relevant items when I refer to them in my posts.

Yesterday, there was this story on Surprise, surprise. Yet another insurance industry (PMI) that may not be able to pay for losses incurred--this time, though, the products being insured are loans.

We, as most people, avoided paying private mortgage insurance (PMI) by placing 20% down or using the 80/10/10 or 80/15/5 or even 80/20/0 (the first number indicates the percentage of the first loan, the second would be a second loan or equity line, and the third is the amount of the down). These are also referred to as "piggyback loans." By structuring your loans this way, you avoid the PMI payment because you are borrowing part of your down. The only drawback is that the second loan could have very high interest rates. However, if the payments for piggyback loans are lower than a loan with PMI, then it sometimes makes sense to go that route (although each loan may have its own fees).

Many buyers do opt for PMI, though, as we have in the past with some of our rentals (back then, it was so easy to wait a few months, have the house appreciate 20%, and then refinance out of the PMI--and maybe get some cash out). Your PMI payment is based on the amount of your down. It can range upward of $300 a month. It really stinks to see the PITI and then another $200-300 for what seems like nothing. It's an intangible service. Apparently, with the PMI companies in jeopardy, maybe it really was for nothing.

It does appear that all those who had a hand in the real estate money pot have been adversely effected by the downturn in the market. Let's take a tally in no particular order:

Real Estate Agents--Agents were a bit over-confident a few years ago. I mean, how hard was it to place a sign up and, within hours, weed through 10 offers--some over the list price? Bidding wars are hard, I know, but at least they mean money for realtors. And what were they doing with all that money? Buying nicer cars, bigger homes, newer offices. You would think that, if they knew anything about real estate, they would have been saving all the money that they were making for the predictable lean times. Now, I bet they'd list a house for a cup of coffee and a hot pizza--but they only show the ones with the highest splits.

Lenders and Mortgage Brokers--How complicated can it be to process a loan application when your only requirement is that the person is breathing? And make mega bucks doing it. These casualties of the downfall deserve everything they've gotten (I don't mean the little worker bees, I mean the corporations). Lenders knew exactly what they were doing when they were underwriting loans whose payments would be increasing in a few short years; and offering already debt-laden consumers equity lines of up to 125% of the home value. Gee, why didn't they stand out in front of casinos and ask gamblers if they wanted to borrow some money? The results would have been the same. And brokers were aware that they didn't always disclose the full truth. Now many are out of business. But, by golly, they got their points, origination fees, processing fees, and kickbacks.

Homeowners--Who are really to blame for the fall of real estate prices--lenders or buyers? Well, the lenders couldn't have sold their deceptive products if there was no market for it. Although this country tries to pin the blame on investors, we are not the majority of the people losing our homes. Most are everyday, ordinary citizens who wanted something that they couldn't afford. When told that they actually could afford it, they believed the very people who would be profiting from their purchase. Hello?! It was the consumers who fed the fire of appreciation. That's all there is to it.

PMI companies--So, one more industry dipping their finger in the greed pie. Victims? Hardly. As they were raking in the dough, neither the CEO's nor the government (that ordinarily wants to regulate every breathing second of our lives) ever stopped to ask if the PMI sector would remain solvent in a downturn of heavy foreclosures. I guess we know the answer to that now.

Builders--As they were snubbing their noses to investors at the same time that they were scratching out the current phase prices and making them $30,000 more, builders had been riding the heyday since around 1998. They were invincible. They had a product that people were camping out for. What a feeling for the sales office personnel to park around the RV's and step over sleeping home buyers in line. They could be rude and people would take it because they were dying to place their deposits on 10,000 square foot cul-de-sac lots (but, in reality, would have taken anything). Even the best developers were selling substandard products (we had water leaks in three of our homes) in order to keep up with the demand. Oh, yeah, life was sooo goooood! Now what? Home prices are being slashed and builders are placing substantial losses on the books. Why do I get the feeling that they are still making a pretty penny by building and selling homes?

Investors--I have to go easy on us. After all, we were the ones trying to improve our lives and provide nice living accommodations for others. We were smart enough to buy homes that other people would pay for --ideally. It didn't always work that way, I know, but at least we tried. Yes, many investors are motivated by money and greed and wanting to get rich quick. But others were willing to buy and hold and not make their first million in a year.

We were preyed upon by real estate agents, mortgage brokers, PMI providers, and builders (only when they needed us to close out a phase fast). But we weren't victims and neither was the PMI industry. We were willing participants in a game that ended too soon. When the market starts to recover, all the same players will start again and we will be doing the same dance. Only this time, I hope that we all will be just a bit wiser.