Green Tree MI Alternatives and LPMI (08/12/13)

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Great resource for Green Tree Correspondents on how to most effectively choose and use the MI alternatives including LPMI

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Green Tree MI Alternatives and LPMI (08/12/13)

  1. 1. Introduction to Mortgage Insurance Alternatives
  2. 2. Why does MI make Sense? • Benefits of MI › Competitive › Cancelable › Simple › Flexible › Support 08/12/2013 2
  3. 3. Objectives • Understand the purpose of mortgage insurance and the various types. • Learn basic criteria for selecting a private mortgage insurance company. • Understand the role private mortgage insurers play in the mortgage industry. • Comparison of coverages and costs for private mortgage insurance. • Private mortgage insurance characteristics. 08/12/2013 3
  4. 4. The Purpose of MI • In today’s challenging economic environment, MI is the most secure way to help borrowers qualify for homes sooner. • MI also helps investors (Green Tree) mitigate exposure, reduce volatility and strengthen their portfolios. • On the borrower side, MI makes possible a range of safer and more secure loan structures. Borrowers have just one loan and one predictable monthly payment. 08/12/2013 4
  5. 5. What’s in it for You? • Set yourself apart • Position MI as a product niche • Earn satisfied customers • Improve referral base • Receive compensation on entire 1st loan amount • Think MI with every loan request above 80%! 08/12/2013 5
  6. 6. What We Will Cover Today • Current Market Snapshot • What is MI? Opportunity • MI is simple, safe & smart Excellent › Originator and borrower benefits • MI Calculability • Premium plans Options 08/12/2013 6
  7. 7. Current Market Snapshot • Market appreciation is slow . . . at best • Change in recent traditional wisdom › “We’ll just refinance you out . . .” • Exotic products coming up to 1st payment adjustment › Payment shock › Not enough equity yet • Non conforming B & C Market Shift • 80/20 blended primary purchases essentially non-existent • Speculation on the future › Rates up › Fewer home sales 08/12/2013 7
  8. 8. What is Private Mortgage Insurance? • Mortgage Insurance is utilized for home loans with less than 20% down payment • Mortgage Insurance protects lenders against the additional risk of borrower default due to low down payment • Enables lenders to accept down payments lower than they would normally accept because exposure is reduced • Extends homeownership opportunities for first-time and low-to-moderate-income homebuyers 08/12/2013 8
  9. 9. What is protected? • Mortgage Insurance provides mortgage payment default protection for the lender on individual loans. • MI is insuring a portion of: › unpaid loan principal › delinquent interest › certain expenses associated with the default and subsequent foreclosure. 08/12/2013 9
  10. 10. When & How much MI is required? Lender Decides • LTV’s of 80.01% and above. • Coverage Percentage › How much “exposure (risk)”? › The lender assess the risk components › The amount of Coverage that is required, loan-per-loan, is determined by the lender. • Exposure (risk) › Is the portion of the loan that the loan holder is responsible for after the MI company has paid the coverage amount in case of a claim. 08/12/2013 10
  11. 11. Another Way of Looking at It • Value/Price • Loan Balance • Coverage (%) $100,000 $ 90,000 25% $100, 000 PURCHASE PRICE OR • $90,000 x 25% = $22,500 (MI Coverage $) $10,000 Downpayment • Result: › Loan Balance $90,000 › MI Coverage $22,500 › Lender Exposure $67,500 25% Coverage $22,500 MI Coverage $67,500 Lender/Investor Exposure $90,000 1st Mortgage 90% LTV 08/12/2013 11
  12. 12. Private Mortgage Insurance is NOT • Credit Life Insurance › Pays off the mortgage in the event a borrower dies • Credit Disability Insurance › Pays off the mortgage in the event a borrower becomes disabled • Job Loss Insurance (Payment Protection Insurance) › Pays the mortgage payment in the event of unemployment (job loss, medical) • Hazard Insurance › Protects homeowner from losses due to fire, liability and theft • Fraud or Appraised Value Coverage › MI does not cover fraud in the loan origination or assure the value of the property as evidenced by the appraisal 08/12/2013 12
  13. 13. Benefits of MI: Originators • One loan › One loan to originate, process, close & service › One loan to sell › Typically results in faster home buying process • Portfolio management › Manages default risk › Loss mitigation tool • Increase business › High LTV qualifies more borrowers › Single lien provides future sales opportunities › Satisfied borrowers lead to referrals and/or repeat business 08/12/2013 13
  14. 14. Benefits of MI: Borrowers • Simple with only one loan to repay › One check to write each month › Borrower-paid MI is cancellable* • Safe homeownership › Manages interest rate & payment risk › Single lien preserves access to future equity • Smart financial options › Higher LTV gets borrowers into a home sooner › Interest paid on financed MI may be tax deductible** *Subject to the Homeowner’s Protection Act of 1998. **May not be tax deductible for all borrowers: borrowers should consult tax advisor. 08/12/2013 14
  15. 15. MI cancelled @ 78% LTV* • Borrower-paid MI for loans originated on or after July 29, 1999 • Automatic termination › 78% LTV of original value • Borrower-initiated cancellation › 80% LTV of original value › No other mortgage liens › No decline in property value • Borrower must be up to date on payments • No refinance of first loan necessary *Subject to the Homeowner’s Protection Act of 1998. 08/12/2013 15
  16. 16. COVERAGE AND COSTS 08/12/2013 16
  17. 17. Components of an MI Premium • Required to determining an accurate MI premium – – – – – – – – – LTV Coverage Level – Set By Lender Loan Program Guide Loan Product Type – Fixed, ARM Term of loan FICO AUS Decision Transaction Type Occupancy Type of MI premium 08/12/2013 17
  18. 18. Steps for Calculating MI 1. Select the Premium Option 2. Select the LTV Coverage 3. Select the Loan Type • Fixed? • ARMs with Annual Cap of 1% or Less (includes Temporary Buydowns)? • ARMs with Annual Caps Greater than 1%? 4. Within the Loan Type, Select from Two Loan Terms • 30 Year Term? • < 25 Years? 5. Other Factors to Consider • Refundable vs. No Refund • Premium Adjustments 6. Information on Renewal Premiums • Zero Monthly, Monthly, Level Annual • Standard Annual 08/12/2013 18
  19. 19. Costs and Payments • Cost to Borrower: › Variety of plans: Single payments Monthly only Up-front plus monthly (Split Premiums) • Payment of Premiums • Can be added to loan amount or • Paid in cash by: • Borrower • Seller • Or lender 08/12/2013 19
  20. 20. Down Payments and Cancellation • Down Payment Required • 3% is allowed under most conforming programs. • Cancellation Policy • Can be cancelled if lender/investor approves. Some plans allow refund of premium in the event of pre-payment. 08/12/2013 20
  21. 21. How to Select a Private Mortgage Insurance Company • Financial stability; ability to pay claims. • Underwriting criteria. • Competitiveness of rates; special programs. • Claims-paying reputation. • Automation capability: speed and service. 08/12/2013 21
  22. 22. MORTGAGE INSURANCE ALTERNATIVES 08/12/2013 22
  23. 23. Traditional Borrower-Paid Mortgage Insurance • No MI premiums at closing › Provided Lender selects no Upfront Premium • First MI payment due with first mortgage payment • Coverage from loan closing • Cancellation2323 › No refund › Borrower’s overall monthly payment lower • Traditionally MI plan of choice • Borrowers will start building equity in their property rather than spend years saving up down payment money or depleting savings and/or retirements accounts. • Pro › Simplicity- one payment per month › Option to Cancel • Con › In some cases, the payment with MI may be high than available alternatives 08/12/2013 23
  24. 24. Lender Paid Single Premium (LPSP) MI • Requires the mortgage insurance policy to be fully paid at closing in one single lump sum payment by the Correspondent. › The lender usually recoups the cost of the MI premiums by building it into the loan interest rate or origination fee (or a combination of both). • All files submitted for purchase must contain a copy of the mortgage insurance certificate. • All MI Providers are Acceptable providers for LPSP • Check Product Matrix Box #32 for LPSP eligibility 08/12/2013 24
  25. 25. LPSP Requirements • Borrowers must have a minimum 660 credit score • 30 year and 40 year terms available • Loan must receive a FNMA Approve or FHLMC Accept recommendation • Loans that receive an FNMA Expanded Approval, Refer with Caution or FHLMC LP Caution are not eligible. 08/12/2013 25
  26. 26. Split Premiums • What are they? › Borrowers have the option to finance a portion of the mortgage insurance premium, or have it paid by a third party. The remainder of the premium is then paid as an annual renewal premium. Since the premium is only due yearly most servicers do escrow. • Benefits to the Borrower: › Lower monthly payments. › Potential for a third party to pay the first year premium, (which lowers the MI costs.) › Financing the first year MI premium lowers closing costs. › Because the financed premium increases the mortgage amount slightly, borrowers have a potentially higher tax deduction for mortgage interest. FinanceAbles Split/Premium are fully refundable – borrowers can receive a refund on the premium paid during the year the refund is requested. › The home buyer’s equity position stays secure, enabling a second mortgage or home equity line of credit later on. › Potential for MI tax-deductibility. 08/12/2013 26
  27. 27. Cost Comparison Assume a loan with the following characteristics $250,000 Loan Amount 95% LTV FICO of 700+ Requires 30% Coverage Monthly cost of MI: $195.83 08/12/2013 27
  28. 28. Split Premium Costs •For the 75 bps option •Up front would be $1875 •Monthly renewal would be $150 •For 100 bps option •Up Front $2500 •Monthly drops to $127 •For 125 option •Up Front is $3,125 •Monthly is $106 08/12/2013 28
  29. 29. Lender Paid Mortgage Insurance (LPMI) • The idea of having lender paid mortgage insurance is relatively simple: your borrower accepts a higher interest rate and the investor pays for the mortgage insurance. • And when you do the math, it is possible that getting LPMI on the loan could save you a chunk of money each month on your borrowers monthly mortgage payment. • One of the problems with LPMI is that not all investors offer in today’s mortgage market. LPMI used to be a much more popular product a few years ago but as options have been limited these products are tough to find. 08/12/2013 29
  30. 30. LPMI Example • Let’s assume the following: › $200,000 purchase price › 10% down payment › 750 credit score › 30 Year fixed rate 4.875% • Option 1 – with standard monthly MI: › $971 Principal & Interest › $84 Monthly mortgage insurance › =$1055 Total • Option 2 – Borrower takes a higher rate of .375% or 5.25% in exchange for no monthly MI • $1013 Principal & Interest • =$42 monthly savings 08/12/2013 30
  31. 31. LPMI: Pros and Cons • Pro › Tax Deductibility › Simplicity- one payment per month • Con › No Option to cancel › If the borrower is going to make large principle payments or will be moving within a short period it is not a good option 08/12/2013 31
  32. 32. FAQ’s • How long will it take before I can cancel my MI? › This will depend on the loan product selected for the 1st lien loan and any state or investor guidelines. • Which option is better for my client? › Depends on their needs and how they want to handle the repayment. 08/12/2013 32
  33. 33. Marketable Simple Tax Deductible Stable WHY FINANCED MI? Low Cost Refundable Profitable Affordable 08/12/2013 33
  34. 34. Objectives • Explain how financed MI works. • Outline benefits of the product: › Lender. › Borrower. • Provide comparisons to other products: › Borrower-paid monthly MI. • Promote lender marketing opportunity: › 3/8 rate advantage. 08/12/2013 34
  35. 35. Financed MI • Borrower or third-party pays a one-time, up-front single MI premium. › Added on top of the loan amount and financed by the borrower OR › Paid by a seller, builder, gift, or other third party OR › A combination of both. › Paid in full at closing. › Refundable for the first 5 years. › Remember to verify investor’s maximum loan limits for ‘sale ability’. For example, when selling to Fannie Mae/Freddie Mac maximum loan amount including financed premium can’t exceed conforming loan limit. 08/12/2013 35
  36. 36. Calculating the Financed Premium • Loan amount • LTV • Coverage • Product • Amortization • Loan type • MI Factor $250,000 X .023 $5,750 $250,000 90% 25% Fixed 30 Years Purchase 2.30% $250,000 + 5,750 $255,750 08/12/2013 36
  37. 37. Benefits to the Lender • Increased origination volume. • Lower cost alternative to many combos. • Easier borrower qualification. • One loan to process and close. • One set of underwriting guidelines. • One standard MI rate on all FICOs 660+ 08/12/2013 37
  38. 38. Benefits to the Lender (cont’d) • Higher loan amounts mean higher commission. • Marketing opportunities. • Competitive edge – be different (isn’t everyone talking standard monthly?). • Ease in servicing. 08/12/2013 38
  39. 39. Benefits to the Borrower • One loan, one payment. • Increased affordability. • Lower mortgage payments. • Potential for MI tax-deductibility. • Reduced closing costs when MI is financed. • Refundable. • May take a second loan sometime after closing. • Potential for third-party to pay “life of the loan” MI. 08/12/2013 39
  40. 40. Financed MI vs. Monthly MI Compare the Savings! Financed MI Standard Monthly MI • .84% for 90% LTV • Loan $250,000 @ 5.00% • P&I = $1,342.05 • MI = 175.00 • Total = $1,517.05 • 2.30% for 90% LTV • Loan $255,750 @ 5.00% • • • • P&I = $1,372.92 MI = 0.00 Total = $1,372.92 Savings: $ 144.13 monthly $1729.56 annually 08/12/2013 Both examples assume a 30-year amortization. 40
  41. 41. LENDER MARKETING OPPORTUNITY 08/12/2013 41
  42. 42. The 3/8 Rate Advantage Your competition may be 3/8 lower in rate but…. your payment with financed MI will STILL be lower. Let’s compare the results … Financed MI Standard Monthly MI • .84% for 90% LTV • Loan $250,000 @ 5.00% • P&I = $1,342.05 • MI = 175.00 • Total = $1,517.05 • 2.30% for 90% LTV • Loan $255,750 @ 5.375% • • • • P&I = $1,432.13 MI = 0.00 Total = $1,432.13 Savings: $ 84.92 monthly $1,019.04 annually 08/12/2013 42
  43. 43. THE ADVANTAGES OF CONVENTIONAL LOANS WITH MI VS. FHA 08/12/2013 43
  44. 44. Ratio Issues? Conventional Loan with Single Premium Loan Scenario: $250,000 Loan 680 FICO 90%LTV 25% Coverage required 30 Year Fixed rate FHA Loan requiring MIP Upfront Premium 1.75 1.75* $4,375 $4,375 Monthly Premium 0.00 1.20% $0.00 $250.00 Total MI paid over 5 yrs $4,375 $19,375 Standard Mortgage insurance saves borrower $15,000 vs. FHA *FHA premium is based on HUD Mortgagee Letter 2012-04 announcing upfront MIP increase to 1.75% and an annual increase to 1.20% for loans with a FHA case number ordered on or after 04.09.12 08/12/2013 44
  45. 45. Borrower tight on cash to close? Conventional Loan with Monthly MI Loan Scenario: $250,000 Loan 680 FICO 90%LTV 25% Coverage required 30 Year Fixed rate FHA Loan requiring MIP $0 Upfront Premium 1.75* $4,375 0.62 $129.17 Monthly Premium 1.20% $250.00 *FHA premium is based on HUD Mortgagee Letter 2012-04 announcing upfront MIP increase to 1.75% and an annual premium of 1.20% for loans with a FHA case number ordered on or after 04.09.12 08/12/2013 45
  46. 46. So, Mortgage Insurance Is… • The Renewed High LTV Alternative • MI may be Cancelable • Easy to use • Fee income earned on total first loan amount SIMPLE SAFE SMART 08/12/2013 46
  47. 47. Green Tree Mortgage Insurance Alternatives Questions? 08/12/2013 47
  48. 48. Further Information • Refer to: – Green Tree Website • www.gtcorrespondent.com – – The Correspondent Funding Client Guide Product Matrix • Contact: – – Client Services 877-700-4622, Option 9 Correspondent_Lending@gtoriginations.com Your Sales Director or Account Executive 08/12/2013 48

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