Home buyers who can afford a down payment that is 20 percent or more of their homes' price traditionally have assumed that they could avoid paying a monthly premium for private mortgage insurance (PMI).
But a growing number of home purchasers making hefty down payments now are being required to dip into their pockets to pay for PMI each month because mortgage companies and investors consider them high-risk cases for a variety of reasons.
"It's not uncommon, and it's increasingly occurring," Warren Lasko, executive vice president of the Mortgage Bankers Association, said of the requirement that some home buyers with down payments of 20 percent or more pay for PMI.
PMI is insurance, sold by 13 companies nationwide, that protects lenders against losses on a defaulted mortgage or safeguards owners of mortgage-backed securities from losses. For example, a buyer who puts $15,000 down on a $100,000 home probably would have to pay PMI to cover the $85,000 balance.
Because of high numbers of foreclosures and low inflation rates, PMI has been required in more cases now than a year ago as one way to cut lenders' losses, according to Lasko.
"Lenders and investors started taking a beating, and they're tightening up, especially when there's any hint of risk involved," he said. "Investors like to have no risk at all."
The higher risk has occurred where foreclosures are made on homes that appreciated little in value, so a lender trying to get enough equity out of a property when a homeowner defaults on a mortgage may suffer huge losses.
Federal law requires PMI if a down payment is 10 percent or less of the home value, and spokesmen for the savings and loan institutions say none of their members require PMI if at least a 20 percent down payment is made.
The Federal National Mortgage Association, known as Fannie Mae, which is the nation's largest purchaser of residential mortgages, also sticks to the 20 percent figure.
But mortgage companies, many of whom are new to the home loan business, are offering packages that may offer attractive, low interest rates but sometimes require as much as 40 percent down payments to avoid paying PMI.
Mortgage companies give a wide variety of reasons for requiring PMI, ranging from locations to type of property purchases, with rental property and vacation homes being prime targets for mandatory PMI.
A loan officer for Merrill Lynch Mortgages said that, although most of their loans do not require PMI if a purchaser has 20 percent down, one of their investors offering loans in the $250,000 to $500,000 range requires a 40 percent down payment for vacation homes or rental property before PMI is not needed.
"It's a riskier loan; it's not a buyer's primary residence," said Barbara Campbell of Merrill Lynch.
Campbell and a number of other mortgage company representatives agreed that it is investors' needs -- not their firms' policy -- that are driving the stiffer requirements for PMI.
"It's their money," Campbell said. "They can pretty well call the shots."
Salomon Brothers Inc., which only entered the home mortgage market in the last two years, usually requires PMI for adjustable-rate mortgages (ARMs) and mortgages for condominiums, investor and vacation property and for homes in earthquake-prone parts of California, even when 20 percent down payments are made.
"On your normal, detached single-family home with conventional financing, it isn't really happening," said a Salomon associate in mortgage financing.
At Shearson American Express Mortgage Corp., which arranged more than $1 billion in mortgages last year, PMI is being required on about 10 percent of loans where down payments are 20 percent or more and where vacation or rental property, self-employerd borrowers, mortgages packaged to sell as securities and undesirable geographic areas are involved.
"It really does depend on what vehicle the investor has chosen as his strategy," said Bob Lee, Shearson's senior vice president of secondary marketing. "We're strictly a pass-through operation."
Lee said that, under one of Shearson's programs, a self-employed borrower who doesn't want extensive probes into his or her financial affairs can put 30 percent down, pay PMI on the entire value of the property and have no questions asked.
Shearson's investors also are requiring larger down payments to avoid paying PMI on property in Houston or Dade County, Florida, because of poor market conditions in those areas, Lee said.
Overall, PMI is required on about 52 percent of the 26,750 conventional home loans including ARMs and in Shearson's current portfolio, company officials said.
A vice president at one local mortgage company said one of its local programs requires a 30 percent down payment for property in the District, but 20 percent for Maryland and Virginia real estate, before PMI is not required.
The PMI premium payments that homeowners make each month by law are passed directly to the mortgage insurance companies, which insured more than $65 billion worth of new mortgages in 1984 compared with about $43 billion in 1983 and about $51 billion this year. Monthly premiums can run anywhere from $10 to $50.
Steve Doehler, executive vice president of the Mortgage Insurance Companies of America, said 1984 was a high year for insurance sales because ARMs hit their peak. These flexible-rate mortgages are considered higher risks, even though recent figures show ARMs have lower delinquency rates than fixed-rate loans.
An official at Mortgage Guaranty Insurance Corp., the largest PMI company, with 20 percent of the market, said PMI started to be required more when security on mortgages became a higher priority. Industry experts say that security-rating agencies now are requiring PMI on a large proportion of mortgages that will be sold as triple-A securities.
Lee at Shearson estimates that 65 to 70 percent of its loans are being put into securities and that PMI is being required on about one-fifth of those with down payments of more than 20 percent.
Mortgage companies and industry analysts are predicting that PMI underwriting standards will be tightening to such a degree over the next several months that many loans now being made with PMI providing the extra margin of security won't even be possible.
Mortgage insurance companies "are trying to eliminate the case where there's no equity," Doehler said.