Academic journal article ABA Banking Journal

Pay Options for Mortgage Insurance Take Off

Academic journal article ABA Banking Journal

Pay Options for Mortgage Insurance Take Off

Article excerpt

New ways of paying private mortgage insurance premiums are catching fire, and insurers suggest they could soon eclipse traditional payment structures. Opinions of the products' pros and cons vary among bank mortgage lenders.

In the past, mortgage borrowers who required private mortgage insurance had two main options: the "annual plan," in which the borrower paid a year's worth of premium at the closing, making monthly premium payments after that; or a single premium plan, in which the entire premium is paid in a lump sum at the closing.

Over the last year, one after another of the companies offering private mortgage insurance have introduced a third option. This consists of policies that require the payment of only one month's premium at the mortgage closing, with premiums being billed monthly thereafter as part of the mortgage payment. (This may vary depending on escrow practices.) A variation called "lender paid"--which one relatively new vendor has built its business around--provides for payments that are built into the mortgage interest rate.

The appeal of both plans for borrowers, for the most part, lies in affordability. The cost differences between the new methods and traditional means of payment won't by themselves turn a renter into a homeowner, but they can lower the hurdle of closing costs, helping qualifying borrowers who are cash-short.

There is a trade-off for the borrower, in that he or she will pay more for insurance under a monthly premium plan. Insurers explain that this compensates them for investment income they give up by taking less premium up front.

A different means of offering customers savings on up-front mortgage insurance costs is marketed by Amerin Guaranty Corp., Chicago. This is lender-paid mortgage insurance. Under this technique, the lender pays for coverage directly, at wholesale prices, and can build the cost of the coverage into its loan rate. Under this program, Amerin says, lenders can even market their mortgages as "no-mortgage-insurance-required" programs. Amerin says this saves borrowers up-front closing costs, and, because of wholesale pricing--albeit with the lender's margin and other factors, it also costs less going forward.

Stuart M. Brafman, president and chief operating officer, says Amerin tends to work with larger originators who produce loans for the secondary market.

Burgeoning volume seen

Mortgage insurers have found that their monthly premium programs have proven quite popular. There are no public centralized figures kept on private mortgage insurance sales volumes, but individual providers have released indicative numbers.

At GE Capital Mortgage Insurance Corp., Raleigh, N.C., a monthly premium plan was introduced almost a year ago. A month or so later, the product accounted for only 2% of business written. By February, the new product comprised 26% of new insurance written, and March application volume indicated that this percentage would grow.

Similar stories are heard from other mortgage insurers. At Commonwealth Mortgage Assurance Co., Philadelphia, requests for monthly premium policies accounted for 33% of new applications received in March, and James C. Miller, president, says he wouldn't be surprised to see monthly premium policies accounting for 75% or more of the company's volume by the end of the year. Commonwealth introduced its product last September.

Mortgage Guaranty Insurance Corp., Milwaukee, Wis., declines to release statistics, but reports that volume has been building every month. "By the end of 1994, it will be the majority of what we do," predicts James MacLeod, senior vice-president.

At PMI Mortgage Insurance Co., San Francisco, monthly premium payments were introduced in March. Volume for the month appeared to be headed for more than 15% of all business, according to Tony Porter, vice-president of marketing. …

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