Getting a home mortgage used to involve just two parties: the person buying the home and the lender. Then the secondary mortgage market entered the picture. Lenders raised money for future loans by packaging the ones they had already written and selling them to outside investors.
There is also a fourth party that's not very well known, but just as important for anyone who wants to buy a home, even if he or she can't make a big down payment. It's private mortgage insurance, and recent troubles in this industry have made many people - particularly first-time buyers - wonder if it's going to be harder to buy their own homes.
Until the early 1980s, profits in the mortgage insurance business were almost guaranteed, and the insurance was easy to get. Then, as now, buyers who could not afford at least a 20 percent down payment had to take out mortgage insurance.
If a buyer could put down only 5 percent, the lender required mortgage insurance to cover the additional 15 percent. Then if the homeowner defaulted, the lender had the 5 percent down payment, the 15 percent from the mortgage company, and the house, which, when sold, would more than cover the loan, especially because it had gone up in value.
Everything worked fine until inflation eased, home prices stopped climbing, economic troubles in the Southwest started putting people out of work, and the value of the homes that many of them had to give up fell. That's when mortgage insurance companies, which had not been as careful about underwriting - risk assessment - as they should have been, started losing money.
``The private mortgage insurance companies weren't underwriting to the degree we should have been,'' concedes Joseph Bryant, executive vice-president for sales at General Electric Mortgage Insurance Companies. ``We as a company, and the industry as a whole, made some mistakes.''
At one time, only 3 to 5 percent of the home buyers who applied for mortgage insurance were turned down. Today the industry rejects closer to 20 percent of the applicants.
While General Electric and most of the other mortgage insurers have survived and learned from their mistakes, the mistakes have been costly for other major underwriters.
One of the more publicized cases concerned TMIC Insurance Company, formerly Ticor Mortgage Insurance Company. TMIC's troubles grew out of its involvement with Equity Program Investment Corporation (EPIC), a company that developed and built about 22,000 homes, mostly in the Southwest, in the 1970s and early '80s.
About half of those homes, however, were not sold to people who would live in them; they were sold to investors, and when home prices in the region started to fall, these investors bailed out faster than a homeowner-occupant might have. Many individual homeowners had to default, too, when jobs in the oil patch dried up. As a result, EPIC was forced to default on loans it had made to build the homes in the first place.
TMIC had insured about half of those mortgages, and when the investors pulled out, TMIC quickly ran out of the money it was supposed to pay EPIC. On Feb. 22, the California insurance commission asked a court to begin liquidation proceedings against TMIC.
``We could see TMIC's troubles coming two years ago,'' one mortgage insurance executive said. ``It was just a matter of when the crash would come.''
Another major company, Verex Assurance Inc., has had its insurance activity shut down since January by its parent, the Greyhound Corporation, which wants to get out of the business. Verex, meanwhile, is in a legal dispute with the Oklahoma Housing Finance Agency, which says Verex is liable for $28 million in claims by lenders. The company disputes the amount, saying some of the policies were obtained fraudulently.
Another major insurer, Wisconsin Mortgage Assurance, a spinoff of the old MGIC Insurance Company, has also stopped writing new policies. And a few other companies with underwriting losses have pulled out of economically depressed parts of the country.
Where does all this leave the home buyer?
First, the problems of the business should not affect the vast majority of those who need mortgage insurance. Still, more people are avoiding the delays and risks of mortgage insurance by working harder to come up with a 20 percent down payment. In places like Texas and Oklahoma, where several companies have stopped writing policies and premiums are high, reaching the 20 percent level may be the only way to buy a house.
``I think you're seeing it more and more,'' says Dall Bennewitz, senior vice-president at the United States League of Savings Associations. ``A lot more people out there are seeing that it's better to have a high down payment.''
People who do need mortgage insurance, however, should view the industry's current troubles as a signal to check their credit histories. With the losses in their industry, private mortgage insurance (PMI) executives are in no mood to take on risky borrowers, and they may even be tougher than the banks, mortgage companies, and other lenders.
``People I could get PMI for a year ago I couldn't get it for today,'' says Robert J. Petrelli, senior vice-president at ComFed Mortgage Company in Norwell, Mass. But some of those who have been rejected have obtained insurance after an examination of their credit records. Sometimes those records were inaccurate, or there were good explanations of why somebody had trouble paying bills. A person may have been temporarily out of work several years ago, but has since repaid all debts, for example.
That's why Mr. Petrelli tells people to check their credit bureau files - it costs less than $10 - and make sure their records are clean, accurate, and up to date before applying for a mortgage.
Finally, if you do need mortgage insurance, you can expect to factor slightly higher premium payments into housing costs. The average annual premium on a $100,000 loan is now about $320, compared with $250 two years ago.
If you have a question that would make a good subject for this column, send it to Moneywise, The Christian Science Monitor, One Norway St., Boston, MA 02115.