Credit crunch: Insurers refuse coverage of some home loans, in areas

Just when consumers and the U.S. economy need banks to lend more freely, the mortgage industry is making it harder to borrow -- even for those with good credit.

Mortgage insurers, whose backing is required for borrowers who can't afford the traditional 20 percent down payment on a home, have already flagged nearly a quarter of the nation's ZIP codes where they refuse to insure some home loans.

That encompasses a wide variety of neighborhoods: McMansions in Scottsdale, Ariz.; luxury Miami condos; 1960 ranch houses in Flint, Mich.; and early 20th century kit homes in Metuchen, N.J. -- and houses in Utah's St. George.

The entire states of California, Florida, Arizona, Michigan, Ohio and Nevada -- which have seen the highest foreclosure rates and the worst price declines -- are blackballed on some mortgage insurers' lists. Twenty-two zip codes in the St. George area were included on lists this month from AIG United Guaranty and Radian Guaranty that flagged "declining markets."

Banks that have lost billions because of bad bets during the housing boom are now reverting to strict lending standards not seen in nearly 20 years, according to industry data and interviews with lenders.

For new homebuyers and those seeking to refinance, it can mean higher down payments and a higher bar for credit scores, among other requirements. The toughest restrictions are in markets where home prices are falling, though regions where property values are rising are not immune.

"We're in the midst of an epic, broad, sweeping change in the mortgage industry," said Chris Sipe, a loan officer with America East Mortgage in Frederick, Md.

The reluctance to extend credit comes despite a flurry of government initiatives, including steady interest rate cuts by the Federal Reserve, intended to make it easier for would-be borrowers and those facing interest-rate resets on their mortgages.

Lenders' growing leeriness threatens to dampen sellers' already soggy prospects for the spring homebuying season -- and that means more pain for the already battered housing sector and the broader economy.

In recent weeks, mortgage insurers have flagged more than 9,600 ZIP codes in at least 34 states where they won't insure certain types of home loans -- those for investment properties or second homes, those with riskier adjustable-rate or interest-only mortgages, or for buyers making down payments of less than 3 percent.

With banks and mortgage insurers pulling back, state and federal programs for first-time buyers and people with poor credit are attempting to fill the void.

Don Brekke, an equipment operator from Colorado Springs, Colo., tried to buy a bank-owned 1950s ranch home for $113,000. At first, he couldn't get a loan because the house was in a potentially declining market and lenders required a 10 percent down payment, more than he could afford.

Ultimately, he was able to qualify for a 100 percent loan from Colorado's state financing authority, and he plans to close in the coming days.

"It was a bunch of headaches -- going around and around to get this done," Brekke said.

The combination of sinking home prices and tighter lending standards has been a major aggravation for Ron Broussard, a 38-year- old sales representative for a home builder.

Broussard took advantage of soaring Southern California property prices three years ago to refinance a loan on a house he had owned since the late 1990s. Today he's still stuck with a $720,000 mortgage and has been renting it out since moving with his family to Texas a year ago. Once appraised for $1.1 million, Broussard's lender now says it's worth about $300,000 less.

He does not yet owe more than the property is worth, but Broussard worries that is a possibility.

"The way the market's going, you know, who knows?" he said.

Broussard has found little sympathy from his lender, Countrywide Financial Corp. While Broussard accepts responsibility for taking out a mortgage whose monthly payments are due to skyrocket once the unpaid principal exceeds the home's value by 15 percent, he feels betrayed by the lender's unwillingness to negotiate better terms.

The stinginess of banks is showing up in home loan statistics: The value of all new mortgages plummeted to $450 billion in the fourth quarter of 2007, down 38 percent from a year earlier, according to trade publication Inside Mortgage Finance.

Subprime loans, made to borrowers with poor credit, virtually disappeared from the market, plummeting 90 percent to $13.5 billion in the October-December quarter.

There is a silver lining: The Federal Reserve has repeatedly cut interest rates, helping borrowers whose mortgages were just about to reset to higher rates and people with student loans. Reflecting the Fed's efforts, rates on 30-year mortgages dropped below 6 percent this week for the first time in more than a month.

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Cat Fund a threat to home insurance

Months before hurricane season, Florida faces an unprecedented threat to its fragile home insurance market, again risking price spikes and policy shortages.

The threat comes from the state's primary tool to prevent such a mishap: the Florida Hurricane Catastrophe Fund.

In an effort to stop rate increases, Gov. Charlie Crist and lawmakers two years ago doubled the size of the fund to sell $29 billion in storm protection to Florida insurers, at prices far below the private market.

Insurers, in turn, were to pass the savings on to homeowners.

But since last fall, Cat Fund advisers have warned that Florida cannot borrow enough money to make good on its promise to pay hurricane claims.

The shortfall is an estimated $18 billion.

Now, two key financial rating agencies, A.M. Best and Demotech, say the state must shore up the fund or they will be forced to downgrade the financial ratings of dozens of insurance companies that rely on state coverage.

If that happens, millions of policies could immediately be deemed worthless, triggering banks to invalidate mortgages that require qualified insurance coverage.

Scott Jenkins, senior vice president for the Florida Bankers Association, calls the resulting scenario "a nightmare."

State leaders are scrambling to find a solution.

But in the current global recession, almost every path leads to further rate hikes in a state already swooning from record foreclosures and unemployment rates veering toward 10 percent.

"We've got to go where we can and find what we can, because we have a pretty serious problem," said Cat Fund Executive Director Jack Nicholson.

The gap in the Cat Fund appeared during hurricane season last year.

Lawmakers in 2007 sought to thwart post-Katrina insurance rate increases by doubling the fund to add $12 billion of hurricane risk.

Florida did not have the cash to pay such losses; lawmakers presumed the state could borrow the money if there was a hurricane.

That borrowing ability evaporated last year with the global credit crisis.

Fund underwriters estimate Florida could raise at most $10.6 billion — more than $18 billion short of the fund's full liability.

Next week, Cat Fund director Nicholson intends to recommend a combination of possible solutions, including seeking financial backing for the fund or reducing the amount of coverage Florida provides.

Nicholson proposes that the governor approve soliciting Wall Street investors to guarantee a loan that might never be needed, a promise that would cost hundreds of millions of dollars.

To straddle part of the gap last year, the Cat Fund paid billionaire Warren Buffet $224 million for the option to borrow $4 billion if needed.

This year, with financial conditions even worse, Buffett has said no.

Twice since December, Nicholson has approached Ajit Jain, reinsurance manager for Buffett's Berkshire Hathaway.

"Their capacity is hurt," Nicholson said. Even if Buffett would recommit, Nicholson said, the price would be higher and the terms "above our resources."

Cat Fund advisers warn that even if a similar guarantee is found elsewhere, it is bound to cost even more.

Hence, Nicholson also wants to ask the U.S. Treasury for a federal guarantee on Florida's hurricane debts or an outright promise to give the state a loan.

Fund advisers acknowledge the quest comes "at a time when many voices are competing for federal money."

Finally, the Cat Fund director believes Florida needs to consider selling less hurricane coverage.

That prospect would force Florida insurers to buy protection elsewhere at much higher rates or reduce their exposure by dropping policies.

The potential hit to consumers is large: insurers get their top layer of hurricane coverage from the Cat Fund at two cents per dollar of protection.

Private reinsurers charge an estimated 25 cents per dollar.

Reducing the Cat Fund by $5 billion would cost insurers — and therefore Florida homeowners — an estimated $1 billion more.

Scaling back the Cat Fund also carries political cost.

Approval would be required not only by the Florida Legislature, but also by Crist, who has made lowering home insurance rates a tenet of his administration.

State Farm's withdrawal from Florida complicates any effort to shrink the Cat Fund.

Hurricane coverage for its policies — one out of five homes insured by the private market — came through State Farm's parent corporation.

Companies picking up State Farm's jettisoned business would be buying reinsurance for those new policies at the same time they would be attempting to replace a portion of the Cat Fund.

The notoriously volatile reinsurance market likely would answer that increase in demand by raising prices.

There is also the risk that private reinsurers could not fill the demand for capital, pushing Florida insurers onto even thinner ice.

Nevertheless, a smaller Cat Fund has strong political supporters, among them Senate budget chief J.D. Alexander.

He plans to use his committee next week to vet the Cat Fund's shortfall.

"My problem is, if you can't write the check you shouldn't write the insurance," said Alexander, R-Winter Haven.

"It's legitimate for Florida to take on some of the insurance risk, but we have taken on so much it sinks the boat."

Rating agencies have made clear they will not wait for a hurricane to expose the Cat Fund's shortcomings.

A.M. Best gave credence to its threat last fall, when it put the ratings of seven major Florida insurers under review, including Allstate Floridian.

The watch was lifted only after hurricane season was over.

Demotech, which examines more than 60 Florida insurance companies that comprise the majority of the market, said it would withdraw its ratings entirely if the Cat Fund shortage is not addressed by May 15, the end of the legislative session and two weeks before the start of the 2009 hurricane season.

The mortgages on most homes require that property be insured by a rated insurer.

Loans backed by Fannie Mae and Freddie Mac must have an A.M. Best rating.

Without the ratings, most home mortgages would go into default, forcing a scramble for coverage in a pinched market.

"From first glance, this would be a concern for us," said Jenkins, the Florida Bankers Association senior vice president. "It could be a headache and a nightmare."

Demotech President Joseph Petrelli — engaged in his own flurry of meetings with Florida politicians, regulators and insurers — said he believes Florida officials will find a way to prevent dozens of insurance companies from losing their ratings.

"We know that May is around the corner in terms of hurricane season, but .?.?. I think the state of Florida is doing as much as it can," Petrelli said.

Meanwhile, he said, many private insurers are arranging a third layer of protection, backup plans to the backup fund.

These range from lines of credit at banks to bridge loans from other reinsurers.

All come with a cost, Petrelli said, and are accompanied by the question of whether there will be rate hikes to pass that cost to consumers.

http://www.ocala.com/article/20090209/ARTICLES/902090992/1402/NEWS?Title=Cat_Fund_a_threat_to_home_insurance

What are rich men's home loans good for?

We are still waiting for the lending squeeze to relax its grip so that those of us with average salaries, average credit reports and average deposits can borrow money for property again. We could be waiting a long time, but in the meantime, lenders are coming up with ways to bargain with us over our financial needs.

The latest trend is the tie-in mortgage, where providers will consider you for a loan if you are an existing current- or savings-account customer or are willing to become one.

Last week, the Halifax joined the swelling ranks of those offering tie-ins with a fixed, two-year deal at 2.99 per cent interest, its lowest rate ever, available only to those who already hold a current account with the branch, or are prepared to switch to it. The move follows the launch of HSBC's two-year discounted mortgage for members of its Premier banking service, also at 2.99 per cent. And Royal Bank of Scotland will offer its packaged current account customers up to 30 per cent off mortgage fees on its new, fixed-rate range.

At first, it seems a good way to get round the credit crunch, but having so much of your day-to-day money held by just one organisation has a whole host of implications, while the conditions on the lending offers are limited to say the least. The Halifax rate is only available for those with a 40 per cent deposit or higher and the fee is a huge 2.5 per cent. Meanwhile, to be a Premier customer at HSBC, and so qualify for its special mortgage deal, you must have at least £50,000 in savings with the bank or a minimum salary of £75,000 and, curiously, a mortgage worth at least £250,000.

"This move towards tie-ins simply underlines the fact that lenders are looking for gold-plated customers," says Louise Cuming, the head of mortgages at price comparison site Money-supermarket.com. "If they can tie a mortgage to a current account, they can cherry-pick the customers they want. It also makes it difficult for a customer to compare the best rates and deals for their needs."

Even if you do fit the bill, these are not necessarily the cheapest deals out there. "They may have a market-leading mortgage rate but the catch is with the other products," notes Melanie Bien, a director of broker Savills Private Finance. "And it is hit and miss whether these will be as attractively priced. In most cases, you would have got a better deal if you had shopped around."

The Halifax current account pays only 0.1 per cent on credit balances, rising to 2.5 per cent for its high-interest account, which doesn't compare favourably with the market-leading 6.5 per cent offered by Alliance & Leicester's free-to- use Premier Direct current account. This means that if you consistently have £500 in your current account, you'd get £32.50 interest a year from A&L but as little as 50p from the Halifax.

Worse still, HSBC offers no interest at all on its current accounts, after recently removing the tiny 0.1 per cent it had been paying on the grounds this would make it easier for customers to calculate their tax return. (It also happens to save the bank an estimated £7m a year.)

A considerably cheaper mortgage rate would easily offset the effect of losing a high rate on the current account. But tie-ins are unlikely to offer you that either. The headline 2.99 per cent rate offered by the Halifax on its fixed, two-year deal is one of the best out there right now, but if you aren't prepared to pay that 2.5 per cent fee (equating to a staggering £3,750 on a £150,000 loan), the rate rises to 3.99 per cent for a £995 fee, or 4.19 per cent for a £495 fee. Alliance & Leicester is offering a two-year, fixed deal for 3.19 per cent at a 2 per cent fee (saving you £750 on the same loan) but is still at a better rate than the 3.99 per cent offer with the lower fee.

Likewise, HSBC's two-year mortgage, set at a discount to its standard variable rate, seems an unbeatable deal at 2.99 per cent for a £999 fee on a maximum loan-to-value of 60 per cent. But again, A&L can do a two-year tracker mortgage at 3.29 per cent with a 2 per cent fee, and you don't need a salary of £75,000 or £50,000 in the bank to do it.

Nor do these products compare well with offset mortgages, which won't demand a tie-in but will offer big discounts on your interest rate. "With offset you are not compelled to opt for other products linked to the mortgage, but it is in your interests to go for them to make the mortgage element cheaper," says Ms Bien. "This is a real benefit to the customer that is not there with tie-in accounts."

Also bear in mind that signing up for one of these deals will mean you have a current or savings account, as well as debts, with one financial company. The money you have in savings with a bank is protected up to £50,000 by the Financial Services Compensation Scheme if that institution goes bust. But if you also owe the same bank money, in this case your mortgage, those savings will be used to pay off your debt first. The chances are that if a bank holding both your mortgage and your savings goes under, you won't see any of your money again.

But if you do go for a tie-in mortgage, it's not just from low interest on savings and high interest on debts that banks will make money.

"As far as they are concerned, the driving force for tie-ins is usually to get hold of your current account because it gives them so much information about your money and spending habits," warns Ms Cuming. "If the bank knows when, how much and to whom you pay your home insurance, for example, they can easily try to sell you products and get more of your money. There is also the question of selling your information on to third parties."

Current accounts also have one of the highest rates of customer loyalty. Lenders are banking on the chances that once your account is with them, you won't leave.

"A year ago, tie-ins were looked on as the unacceptable face of mortgage lending," says Francis Ghiloni at mortgage comparison site mform.co.uk. "But nowadays, almost anything goes and borrowers have to jump through more and more hoops."

It isn't as if this type of mortgage will do anything to alleviate the wider lending crisis, either. "It adds to the development of two distinct groups of borrowers: the cream of the crop with perfect credit scores and plenty of savings, and the rest of us," adds Ms Cuming. "The Government wants to free up money for lending, but all the banks are doing is lending to the upper echelons of society. If we are to have any hope of getting the market moving, lenders must do business with first-time buyers who need to borrow 95 per cent of the value of a property."

http://www.independent.co.uk/money/mortgages/what-are-rich-mens-home-loans-good-for-1515006.html

Citi reaches deal with lawmakers on home loans

WASHINGTON (AP) — Democratic lawmakers have reached a deal with Citigroup Inc. on a plan to let bankruptcy judges alter home loans in an effort to prevent foreclosures and urged other lenders to follow suit.

The lawmakers aim to attach the plan to President-elect Barack Obama's economic stimulus legislation, and said Thursday the change in bankruptcy law could ease the foreclosure crisis that has dragged the economy into the worst recession in decades.

The compromise between Citigroup and Sens. Richard Durbin of Illinois, Charles Schumer and Christopher Dodd of Connecticut, would be limited to loans made before the bill is signed. Obama has said he backs the concept.

Schumer said he received calls Thursday from several banks — which he did not name — indicating their potential interest in supporting the idea.

"This is a breakthrough day," the senior senator from New York said in a news conference on Capitol Hill. "We've been stymied because the banking industry opposed this simple provision, which is key to getting a floor to the housing market."

In a letter to lawmakers, New York-based Citigroup's chief executive, Vikram Pandit, said the change to bankruptcy law "will serve as an additional tool to the extensive home-retention programs already in place to help at-risk borrowers."

The so-called "cramdown" proposal has been backed by Democrats over the past year as a potential solution to the foreclosure crisis. Consumer advocates and Democrats say it would prod the lending industry to be more aggressive about modifying loans because of the looming threat of having a bankruptcy judge involved.

But the lending industry has battled fiercely against the idea, arguing it would force lenders to hike mortgage rates because they would have to charge more for loans that could be altered later by a judge.

"This would hurt the housing market at the exact time we're trying to stimulate it," said Scott Talbott, chief lobbyist at the Financial Services Roundtable, which represents large banks and insurance companies.

To qualify, borrowers would need to demonstrate that they have asked their lender for a loan modification before filing for bankruptcy.

Currently, a 1993 Supreme Court decision bars judges from altering first mortgages on primary homes, though such changes are allowed on loans for vacation homes, motorcycles, boats and other kinds of property.

Consumer advocates say that is unfair, while mortgage lenders contend it benefits the vast majority of borrowers who don't fall into bankruptcy because it keeps mortgage credit for primary residences cheap.

Other attempts by the government to deal with the surge in foreclosures over the past two years haven't made much of a dent in the problem.

A federal program, dubbed Hope for Homeowners, was intended to let 400,000 troubled homeowners swap risky loans for conventional 30-year fixed-rate loans with lower rates. But the early results have been disappointing, with fewer than 400 applications since the program's launch on Oct. 1.

In an interview earlier this week, a lobbyist for the mortgage industry vowed to keep the bankruptcy judge plan out of the economic recovery bill.

"We think that's an unwise move that could delay the stimulus package," said Francis Creighton, the Mortgage Bankers Association's chief lobbyist.

In a speech Thursday at George Mason University outside Washington, Obama asked Congress to work with him "day and night, on weekends if necessary" to pass an economic revival plan within the next few weeks so that it can be ready for his signature shortly after he takes office on Jan. 20

Obama promised to rewrite financial regulations and pledged to launch "a sweeping effort to address the foreclosure crisis so that we can keep responsible families in their homes."

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Senior Home Buyers Allowed To Use Reverse Mortgage

Beginning Jan. 1, home buyers 62 and older will be able to buy a house using a reverse mortgage, as long as it's their primary residence.

Traditionally, people obtained reverse mortgages to take equity out of their existing homes to help them meet expenses, pay off the mortgage or pay the property taxes.

But staff members at the Federal Housing Administration noticed an increasing number of seniors selling their homes, buying new homes and then getting a reverse mortgage to pay off the new home, said Meg Burns, director, FHA office of single-family program development.

"They were going through two mortgage transactions and paying all those fees," she said. "Seniors need to keep their money in their pocket."
When the FHA staff members looked further, they found that the traditional reverse mortgage program designed to keep seniors in their home wasn't helping those who wanted to downsize, move to a house without stairs, move closer to their kids or move into active adult housing.

Burns said a program allowing a Home Equity Conversion Mortgage for purchase "came from us internally" as a way to accommodate that kind of consumer.

Fannie Mae launched a reverse mortgage program for purchase in 1997 called a Home Keeper for Home Purchase, but Burns said it was not used much because of borrowing limits.

With a reverse mortgage, the borrower takes the equity out of the home either as a lump sum, a line of credit, in a monthly payment or as a combination of these. The loan is repaid when the borrower sells the house or the last homeowner dies or moves out. The amount of the loan is based on the home's value and the youngest borrower's age.

A Cap On Fees
A new law that went into effect this fall imposed a $6,000 cap on origination fees, and that law applies to the HECM for purchase loan. Lenders can charge 2 percent of the first $200,000 of loan value plus 1 percent of any additional loan value. Consumers are still charged 2 percent for FHA insurance.

The FHA insurance protects both the borrower and the lender. If the bank should go under, consumers still will receive their reverse mortgage. And if the home's value drops below the original loan amount when the senior dies or moves out, the insurance protects the lender.

Consumers should expect to pay fees similar to a traditional reverse mortgage, with the additional fees relating to a purchase of a home such as recording fees and transfer taxes. Borrowers are still required to meet with a third-party, HUD-approved consumer counselor so they understand their options.

Those using a HECM loan for purchase must buy a one- to four-family house. The HECM for purchase may be used for new construction that has been completed and received a certificate of occupancy. Purchasers must move in within 60 days of closing.

"We talk to seniors. The folks we've talked to agree that it makes sense," Burns said. "I feel like this product is going to address a social issue for them."

Refinancing applications boost home-loan volume

WASHINGTON – The number of home-loan applications filed nationwide rose last week compared with a year ago, according to a report today from the Mortgage Bankers Association.

In the week ended Dec. 5, the trade group’s seasonally adjusted Market Composite Index – a measure of overall mortgage loan application volume – was 796.8 points (March 16, 1990 = 100 points). That represented a decline of 7.1 percent from the 857.7 points of the week ended Nov. 28 (after adjustment for the Thanksgiving-shortened work week), but an increase of 99.90 percent from the eight-year low of the week ended Nov. 15 (READ MORE) and a year-over-year increase of 2.2 percent.

The MBA survey, conducted weekly since 1990, covers about half of all U.S. retail home mortgage applications.

Its seasonally adjusted Purchase Index fell 17.4 percent week-over-week to 298.1 points, after rising 38.0 percent the week ended Nov. 28 and 5.3 percent the week before that. Applications to purchase a home using Federal Housing Authority (FHA) and other government-backed loans fell 21.3 percent last week while applications for non-government backed loans fell 15.5 percent, the MBA said.

The Refinance Index dipped 0.9 percent last week to 3,767.3 points, after surging 203.3 percent Thanksgiving week and falling 2.1 percent the week ended Nov. 21. Refinancing was the goal of nearly three-quarters of loan applications last week – 73.7 percent – up from 69.1 percent in the week ended Nov. 28 and 49.3 percent in the week ended Nov. 21, the MBA said.

The share of mortgage applicants who were seeking adjustable-rate mortgages (ARMs) – rather than conventional fixed-rate loans – fell to 1.1 percent last week from 1.4 percent Thanksgiving week and 3.0 percent of applications filed in the week ended Nov. 21.

The average contract interest rate for a 30-year, fixed-rate mortgage dipped to 5.45 percent last week from the previous week’s from 5.47 percent, while the contract interest rate on a 15-year, fixed-rate loan declined to 5.09 percent from the previous 5.13 percent. But the average contract rate on a one-year ARM rose to 6.76 percent from the preceding week’s 6.61-percent average.

Still, by historical standards, “mortgage applications for purchases remain subdued,” Anna Piretti, a senior economist at BNP Paribas in New York, told Bloomberg News. And, she added, “tighter credit standards suggest actual lending remains constrained, weighing on sales.”

The Mortgage Bankers Association is a trade group representing the real estate finance industry. Its 3,000 member companies include mortgage firms, commercial banks, thrifts, life insurance companies and others. Additional information, including the MBA’s Weekly Application Survey, is available at www.MortgageBankers.org.

Home Insurance

Insurance is a contract between the insured and an insurance company that protects against the risk of large and calamitous loss.

The importance of home insurance cannot be undermined. There are two primary reasons why home owners buy home insurance. Firstly, a home is the most important asset belonging to a home owner, and the need to protect it is imperative. Secondly, mortgage lenders require home owners to own insurance to protect the lender’s investment form damage or loss.

The major risks covered by home owner’s insurance are:

Damage or loss to the home and other structures included on the property

Damage or loss to personal property items in the home

Injury or harm to third parties who come to your home

The home insurance covers the person insured and the members of his home. Third parties who come to your home are also covered through the liability portion of the insurance policy for injuries. Additionally, you and your family members also have some liability protection to others even while you were away from your home.

There are two distinct types of insurance under home insurance - Title insurance and Homeowner's insurance. They protect against totally different types of risks.

Homeowner's insurance covers loss or damage to the home, structures on the property, personal contents of the home, as well as third-party liability.

Title insurance, on the other hand protects ownership interests in the real property. Title insurance is purchased to guarantee that the home owner has a good and marketable title to the property. When purchasing a home by means of a loan, lenders require you to obtain title insurance. That way they know that you have clear ownership of the real property and the home.

The title insurance company conducts a search to find out what liens, encumbrances and defects are present to the title as it stands in the hands of the seller before you can obtain the loan. Once the title insurance coverage is obtained, the Title Company guarantees that the buyer has marketable title to the property after the purchase. Any liens, encumbrances and other defects to the title that occur during your ownership of the property, however, are not covered by this insurance

William Brister - http://www.businessproguide.com - A guide to all your business needs. http://www.insuranceproguide.com - Everything you should know about insurance

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