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   ARTICLE   |   From Scotsman Guide Residential Edition   |   October 2014

Borrower-Paid Private Insurance Takes a Hit

Because of the qualified mortgage standard, borrowers’ insurance options may be shrinking

Borrower-paid private insurance takes a hit; the ability-to-repay rule's impact on private mortgage insurance options

The requirements of the ability-to-repay (ATR) rule affect all aspects of the mortgage industry. Many of the ATR rule’s effects have been covered ad nauseam in recent months, but one effect of the ATR rule that many originators may be unaware of is the impact that the rule will have in regard to the availability of certain private mortgage insurance (PMI) options. More specifically, the ATR rule’s qualified mortgage (QM) standard affects borrowers who want to pay their private mortgage insurance upfront as part of their closing costs and illustrates how QM restricts popular insurance options that were once widely available.

There is a lot to like about the QM standard. Borrowers are protected from irresponsible lending and risky products that many say contributed to the housing crisis. Lenders, under QM, must make a good-faith effort to ensure that their borrowers have the ability to repay a mortgage before lending to them. This certainly sounds like common sense.

Private mortgage insurance hasn’t been an issue with QM when it involves lender-paid insurance. Under that scenario, the lender increases the interest rate in exchange for paying the entire premium for the borrower. Some borrowers like this option because it allows them to add the cost of the mortgage insurance into the principal and interest payment.

Likewise, the QM standard isn’t an issue if the borrower selects a borrower-paid monthly payment, which is generally the most common option selected. In both of these scenarios, the insurance premiums are excluded from the 3 percent points-and-fees cap under the QM standard.

The QM standard requires, however, that any mortgage insurance paid by the borrower at the time of closing that’s not refundable pro rata must be applied toward the 3 percent points-and-fee calculation. Any refundable borrower-paid insurance premiums paid at closing in excess of 175 basis points must also be included in the 3 percent calculation.

This means that the QM standard has had — and will continue to have — a significant impact on the borrower-paid single-premium option. With this product, the borrower pays the PMI at closing, generally with an upfront cash payment or by financing the insurance into the loan.

This had been a beneficial choice for certain borrowers who were able to remove their monthly mortgage insurance from their total payments, thus dropping their monthly payments. Paying upfront with the borrower-paid single-premium option could also expand a borrower’s purchasing power because that borrower’s monthly payment will go entirely to the loan’s principal and interest.

Although the QM standard doesn’t restrict this type of structure, it affects the points and fees that may be applied to other services that lenders can charge for — such as underwriting — so, staying under the 3 percent cap has become an issue for many lenders. As a result, it’s becoming less likely that lenders can offer their borrowers the aforementioned option.

In some companies’ experience prior to the implementation of the QM standard, the single premium option was the choice of borrowers roughly 20 percent to 30 percent of the time. With the QM standard in place, however, this option is less viable, even for highly motivated borrowers. Let’s say, for instance, that a borrower has a relocation company paying a credit toward the closing costs, and the borrower understandably wants to use this credit to buy down the rate by paying points.

When that borrower’s broker adds the points to the upfront mortgage insurance, however, it’ll likely create a QM issue and the borrower will be forced to change the structure of the deal. More specifically, the borrower will probably have to change the insurance structure to a monthly borrower-paid program that will include the monthly amount into the monthly mortgage payment.

Although the borrower-paid single premium option wasn’t the most common scenario requested by borrowers, it was an option that made sense for some and now may all but disappear under the QM standard. It seems unfortunate that a rule designed to protect consumers and lenders is limiting what was once a viable PMI option. For their part, mortgage brokers and bankers should be aware of this limitation from the get-go of a deal, considering that scenarios like the example given may complicate the details — or the entire viability — of a loan at hand. 


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