One of the key players in the home mortgage market has quietly signaled that it thinks real estate speculation in some parts of the country is approaching worrisome levels.
PMI Mortgage Insurance Co. told its network of lenders nationwide that it will no longer insure new loans made to borrowers who already have more than four mortgages outstanding or who represent more than $350,000 worth of "risk exposure" to the company.
Another large underwriter, Mortgage Guaranty Insurance Corp., known as MGIC, confirmed that it, too, is monitoring real estate speculation in hot housing markets and has serious concerns about certain interest-only mortgages that investors are using to buy multiple houses or condos.
The companies were responding to a study that found that nearly 25 percent of homes bought in the United States last year was for investment, not for owner occupancy. Thirteen percent of purchases were vacation homes, according to the National Association of Realtors.
Mortgage insurers, who underwrite loans with low down payments, are highly vulnerable to defaults by speculators who find themselves with negative cash flows on multiple houses. Mortgage insurers generally cover the first 25 percent of a lender's losses on a home loan that goes belly up, but in some cases they cover even more.
"We're seeing an increase in investor loans," PMI spokeswoman Beth Haiken said, "so from a risk-management standpoint" the company decided to tighten its guidelines for borrowers with home loan debt on multiple properties or who present high potential loss exposure.
MGIC's vice president for credit policy, David Greco, said the company is "watching a number of markets closely" for signs of excess speculation, such as individual investors buying houses or condos to hold for short periods, then flip for quick profits.
The problem, according to insurers and others in the mortgage industry, is that when property-appreciation rates decline in the hottest markets, speculators are likely to be stuck with properties they can't sell at the prices they need. Negative cash flows are then likely to push them into default.
Anecdotal evidence has mounted for a year or more that speculation is helping push prices higher in the Washington area, southern California, Las Vegas and Reno in Nevada and Miami. All those areas racked up substantial double-digit home-price gains in 2004 but also showed signs of significant cooling in the final quarter of the year.
For example, Las Vegas has a 36.2 percent average gain in home prices during the past calendar year. Yet prices in the fourth quarter gained 6.7 percent on an annual basis, according to a new survey by the Office of Federal Housing Enterprise Oversight.
In San Diego, prices in the fourth quarter jumped an annualized 8.96 percent vs. 24.4 percent for the year as a whole. In metropolitan Washington, annualized price gains slowed to 9.8 percent from 21 percent. In previously booming Boston, home price appreciation in the fourth quarter dropped to just 4.48 percent on an annualized basis.
PMI's Haiken said certain types of mortgage financing plans commonly used by investors can worsen the problem. Interest-only adjustable-rate mortgages with initial two- or three-year periods of low monthly payments followed by sharply increased costs can force investors to sell on disadvantageous terms, when appreciation rates decline.
"We are approaching interest-only loans very carefully," said Haiken, particularly when small-scale investors use this type of mortgage to buy multiple houses or condos for speculation in hot markets that may have hit their cyclical peaks.
Haiken's firm has identified a handful of high-froth metropolitan areas with the greatest likelihood of home value declines over the next 24 months. The PMI Risk Index looks at median household incomes, median mortgage payments, employment changes and home affordability.
Atop the list are Boston and San Jose, both of which have better than a 50 percent chance of seeing home price reversals in the next two years, according to PMI, followed by San Francisco (48 percent chance), Providence, R.I. (40 percent), metropolitan New York and Los Angeles (36 percent). Metropolitan Washington, which has had strong employment and income growth along with rapid home price escalation, is rated an "average" risk by PMI, with just a 15 percent chance of property-value declines during the coming 24 months.
The takeaway here: Before you start playing Monopoly with real houses and condos, give serious thought to whether you might be buying into the top end of the boom, without reaping the big, quick gains you want or need.
Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.