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Tess Vigeland: Alright, the Fed isn’t the only one issuing quizzes. You send ’em to us all the time and one popular question we’ve been getting in the midst of the housing meltdown is this: How come private mortgage insurance isn’t saving us from the subprime mess?
If you have to get PMI in order to put less than 20 percent down, shouldn’t all that insurance be kicking in?
We asked Marketplace’s Jill Barshay to look into it.
Jill Barshay: Once upon a time, home buyers who couldn’t or didn’t want to put 20 percent down had to buy private mortgage insurance. Lenders wanted protection against people walking away from properties they didn’t have much equity in.
So you’d think with all the 90 percent — even 100 percent — home loans out there that private mortgage insurers would be suffering and paying claims left and right.
Jack Guttentag is professor of finance emeritus at the Wharton School of Business. He says mortgage insurers aren’t in as much trouble as lenders are.
Jack Guttentag: Not all loans are insured. And in particular, the loans with the highest rate of foreclosure, the subprime loans, a very large proportion of those did not carry mortgage insurance.
A lot of subprime lenders didn’t care, but even regular borrowers could buy a house with little or no money down and avoid mortgage insurance. Banks were willing to issue them a piggyback loan for their down payment in lieu of insurance.
Now mortgage lenders have to eat the losses on those uninsured loans themselves.
Jeff Lubar of the Mortgage Insurance Companies of America says lenders are once again insisting that home buyers take out private mortgage insurance.
Jeff Lubar: We’re writing about 40 more policies this month compared to the month before.
Insurers are even getting picky. They’re even demanding higher credit scores and raising premiums.
Lubar: In certain markets where values are dropping, what they call declining markets, more money up front might be required, more skin in the game so to speak. 5 percent down, whereas before it might have been 3.
For home buyers who are now being asked to pay for mortgage insurance, the experts say to take the cheapest one you can find. Professor Guttentag:
Guttentag: It’s not you. It’s the lender who’s covered by the insurance and if the worse came to the worst and every mortgage insurer folded its tent, it wouldn’t have any impact on the individual borrower.
And since 2007, the insurance is tax deductible if you make less than $100,000 a year.
In New York, I’m Jill Barshay for Marketplace Money.
Vigeland: By the way there was more grim news from the mortgage mess this week. Pending home sales fell in February to their lowest level since 2001.