Here's the basics of California's rules governing private mortgage insurance
, according to the California Mortgage Bankers Association:
Even while Fannie Mae and Freddie Mac are encouraged to promote lending to lower-income households, their charters may also create barriers to such lending by limiting the risk they may bear: The mortgages they purchase, unless they carry private mortgage insurance or some other form of credit enhancement (for example, recourse to the lender), must have loan-to-value ratios of 80 percent or less.
Risk-adjusted capital requirements also discourage depository institutions from holding some types of nonconforming loans: For mortgages having a loan-to-value ratio of more than 80 percent and no private mortgage insurance, they must hold more capital to guard against losses.
From 1990 through 1995, the percentage of mortgages originated annually with private mortgage insurance doubled (see Figure 2).
Together, these groups will fuel the need for low-down-payment financing, as well as the need for credit enhancement and protection from losses that private mortgage insurance provides to the conventional mortgage market.
To evaluate the respective roles of the FHA, the VA, portfolio lenders in the primary market, secondary market institutions, and the private mortgage insurance companies, we compared information on individual home mortgages reported by lenders covered by HMDA in 1994 to those reported by PMI companies for that year.
By merging HMDA data with data from PMI companies, we created a unique database that allowed us to count the total number of mortgages that were originated by institutions in metropolitan areas during 1994 as well as the number of such mortgages covered by private mortgage insurance.
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Growth of insurance in force or risk in force may be adversely affected by the factors affecting mortgage demand referred to above, and by alternatives to private mortgage insurance, including government mortgage insurance programs; use of credit enhancements by investors, including Fannie Mae and Freddie Mac, other than private mortgage insurance; use of other credit enhancements in conjunction with reduced levels of private mortgage insurance coverage; holding mortgages in portfolio and self-insuring; and use of structures designed to avoid private mortgage insurance.
Growth of insurance in force or risk in force may also be adversely affected by the competitive environment in the private mortgage insurance industry, including the type and pricing of products and services offered by the company and its competitors; and by persistency (which in turn is affected by interest rates, house prices and matters affecting when private mortgage insurance may be canceled).
Even though the law doesn't formally affect loans made prior to July 29, it has served to raise consumer awareness about the ability to cancel private mortgage insurance